16 January 2013

Uganda: Economy to Grow 7 Percent - IMF

Uganda's economy is on track to grow between 6% to 7% in the current financial year, the International Monetary Fund (IMF) has said.

The growth is dependent on higher commercial bank lending, institutional reforms to refine the inflation targeting framework and efficient management of revenues, especially from the oil sector.

Bank of Uganda jacked up interest rates in the second half of 2011 to fight soaring prices, as inflation peaked at over 30%. It then launched a run of monthly growth-boosting rate cuts in June last year, which it paused for the first time this month with inflation at 5.5%.

Although inflation has been brought under control, economic expansion is comfortably below its potential growth rate of about 7%, the Central Bank has said. "Reviving economic activity is, therefore, an urgent priority for the low-income economy," the IMF said in a statement released on Monday. "To this end, the Central Bank's short-term policies are appropriately geared at maintaining essential public investment and encouraging a gradual resumption of bank lending, while continuing to allow the shilling to reflect market conditions."

The IMF forecast in November the Ugandan economy would grow 5% in the 2012/13 fiscal year, from 3.4% in the previous period. The Washington-based body also said the recent theft of donor funds, which led to some donors suspending aid, signaled the need for a more radical fight against graft.

Stephen Kaboyo of the Alpha Capital partners says the revised 7% economic growth projection is in line with expectations. He, however, notes that most of the growth is coming from the services sub-sector, which employs fewer Ugandans.

"There are green shoots starting to sprout in Europe, which is a major export destination. The Bank of Uganda monetary policy statement for January also acknowledges that vital economic indicators are positive," Kaboyo said.

"A number of Ugandans may not realise the growth, since 80% of the entire population is employed in agriculture which does not contribute as much to growth in the economy as the services sector," he added.

The services sector grew 3.1% last financial year, despite negative annual growth rates in trade, financial, education and health services sub-sectors due to a financial recession in the US, debt crisis in Europe and high local inflation.

Inflation has since fallen from 30% in October 2011 to 5.5%, while the European debt crisis and the US financial recession have bottomed out, creating bright prospects for Uganda's economy.

Uganda's economy was growing at 5% at the end of the year 2012, surpassing earlier projections of 4% growth. The IMF completed its fifth review of Policy Support Instrument (PSI) for Uganda, later endorsing the country's macroeconomic performance as "satisfactory".

"The anti-inflationary strategy underpinned by tight monetary policy and under-execution of budget spending brought inflation under control - an important policy achievement," says a statement from the IMF.

Naoyuki Shinohara, the IMF deputy managing director, hailed the Government's action plan to strengthen public financial management, adding that there is need to rebuild confidence of the population and development partners in public sector operations.

Finance minister Maria Kiwanuka tabled a new Public Finance Bill 2012 that will make the Government more accountable to the Parliament through significant changes to the Budget Act 2001.

"Forceful implementation of this plan is essential to prevent reoccurrence of misappropriation of public funds, restore budget financing and facilitate growth, enhancing development spending," Shinohara said.

The Government has since repaid aid worth $5m (sh14b) to Ireland that had hitherto been diverted from the Peace, Recovery and Development Plan (PRDP) in the office of the Prime Minister.

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