Uganda's economy could slow down if the political turmoil in South Sudan continues, Bank of Uganda (BoU) has warned.
Dr Adam Mugume, the executive director Research at BoU, said on Friday that the conflict was likely to reduce the exportation of Ugandan food and construction materials to South Sudan.
"When there is a conflict, people will not build and they will not demand for food. This is likely to reduce on the in-flows [to Uganda]," Mugume said during the release of THthe monthly monetary policy statement at BOU.
The Democratic Republic of Congo, which remains volatile as a result of fighting there too, and South Sudan are among the major trading partners for Uganda, Mugume said.
"For now, we are not sure of what is likely to happen in [South] Sudan and DRC," he said.
The conflict in South Sudan started in mid-December, after President Salva Kiir accused his former deputy, Riek Machar, of attempting a coup. It has since morphed into what is looking like a full-scale civil war, complete with peace talks in another country - Ethiopia. Many Ugandans who dominate the informal trade in the capital Juba have suffered heavy losses and many have returned home.
Mugume said Uganda's exports to South Sudan were valued at $220m per month. In 2012, Uganda earned an estimated $1.3bn from exports to South Sudan, according to figures from BoU. The figure is an improvement from the $630m Uganda earned in 2010.
Meanwhile, inflation continued to drop in December. Core inflation, which measures the changes in prices of goods and services minus utilities, dropped from seven per cent in November to 5.7 per cent. With inflation declining, BoU kept the central bank rate at 11.5 per cent for the second month running.
"BoU forecasts suggest that inflation will edge down further in the near term driven by improved food crop harvests but rise to 6.5 and 7.5 per cent during the latter part of 2014," said Governor Tumusiime Mutebile, while presenting the policy statement.
Not so much is expected to change in terms of the private sector credit growth. Mugume said very few people were applying for loans. Banks have also recorded an increase in their non-performing loans; they are now cautious on who they lend to. Interest rates have remained high - averaging 22 per cent.
The key monetary rate is likely to impact on the foreign exchange market, where for the last week, the shilling slightly depreciated against the dollar due to increased demand for imports.
But foreign investors looking to place funds in Uganda's securities market will look to the yields on instruments like the treasury bills and treasury bonds, which remain lucrative as a result of the unchanged Central Bank Rate. BoU expects the economy to grow between 6.2 and 6.5 per cent this year.
Mugume says if the situation in South Sudan and the DRC is not resolved quickly, the economy's growth could be affected by about 0.5 per cent. Growth in the first quarter of the financial year 2013/14, however, declined compared to the previous quarter.
BoU says the economy is likely to pick up in the remaining part of 2013/14, driven by the recovery in agriculture production and public investment in infrastructure.