9 March 2014

Uganda: Aid-Cuts Talk a Rumour - BoU

Government will not cut its growth prospects because of the donors' threats to cut aid, the Central bank governor has said.

Presenting the March monetary policy statement last week, Governor Emmanuel Tumusiime-Mutebile said even if direct aid was cut, the money would be channelled to NGOs and the private sector, thus staying in the country.

"The worst scenario would be for aid not coming at all, but we know the NGOs will get the money [and spend it in the country]," Mutebile said. "Government has not received any formal communication of anybody cutting aid."

BOU forecasts Uganda's economy to grow in the ranges of six to 6.5 per cent this financial year, although some analysts say growth could eventually be lower if aid cuts happen.

Already, the World Bank suspended the $90m loan to the health sector. Some countries like Norway, Sweden, and Canada have said they would withhold support to the country. The USA said it was reviewing its relationship with Uganda.

Analysts say Uganda should not just brush off donors arrogantly because aid support means a lot to the economy. Lawrence Bategeka, a former principal at Makerere's Economic Policy Research Centre, said if aid cut threats were fulfilled, we would see slowed growth this financial year.

"Aid has been our life-support machine; and the earlier we learn to do without aid, the better," he said.

"We have been accustomed to aid so much that it plays a big role in our economy. Take for instance, health aid; almost most ARVs come from America. When you switch off and we don't have where to turn, then it's catastrophic."

Meanwhile, the shilling has for the couple of weeks weakened against the dollar, which prompted BOU to intervene thrice pumping dollars into the market to limit further shilling depreciation. The shilling rotated around Shs 2,540 - Shs 2,580 last week.

"In assessing the market conditions, the knee-jerk reaction was sentiment driven as the markets took a view that these [aid cuts] could hurt the confidence of the international community," says Stephen Kaboyo, the managing director at Alpha Capital.

"Traditionally, grants and concessional loans are an important source of government financing," he added.

On the likely direction of the Uganda shilling going forward, Kaboyo says the depreciation pressure will die down once the market shrugs off the negative sentiment. Inflation continued to fall in February, with core inflation, which measures changes in prices of goods and services minus food, piped water and electricity, falling to 3.7 per cent last month, from 4.6 per cent in January.

Governor Mutebile said the decline was largely driven by a stronger shilling, which in over the last twelve months had appreciated by seven per cent. BOU says inflation could rise again in the next few months.

"There are potential risks of stronger inflationary pressures, including those from possible further exchange depreciation... ," Mutebile said.

"The magnitude and timing of possible declines in foreign aid is also cause for uncertainty," he said.

The Central bank said it would keep a keen eye on the events as they play out in the economy and it held its key rate at 11.5 per cent for the fourth month in a row. Charges on loans in commercial banks remain in the averages of 22 per cent.

"There are risks to growth outlook emanating from weak bank credit growth," Mutebile said.

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