KAMPALA - The Ugandan economy will grow 6.25 percent this fiscal year, driven by heavy public investment which is seen sharply widening the fiscal deficit, the International Monetary Fund said on Monday.
The private sector's contribution to the economy's expansion remained sluggish, the IMF said, in part due to stubbornly high commercial lending rates.
The IMF forecast Gross Domestic Product growth in Uganda, which targets becoming an oil producer in 2016, would accelerate to 6.50 percent in 2014/15 and 7.1 percent in 2015/16. East Africa's third biggest economy grew an estimated 5.75 percent in July-June 2012/13 fiscal year, the IMF said.
"Key challenges remain making growth inclusive by integrating lagging regions to the economy (and) improving agricultural productivity," the IMF said in a statement.
"Uganda is also vulnerable to political instability in the region and to risks from governance weaknesses, overspending pressures, and capacity constraints," it said.
Highlighting the risk, two weeks of violence in neighbouring South Sudan, among Uganda's leading export destinations, has severed vital trade routes.
The IMF said that Uganda had scope to scale up public spending on infrastructure projects this year as the underlying balance, net of one-off factors, would only increase marginally.
Even so, it needed to be accompanied a strengthening of tax revenues and financed by sustainable levels of external and domestic borrowing, the Washington-based body said.
The IMF projected Uganda's core rate of inflation food crops, fuel, electricity and metered water would average 6.9 percent this fiscal year.
The central Bank of Uganda acknowledged the second-round inflationary risks from food price increases, but believed this was mitigated by below-potential economic growth and September's rate hike, the IMF said.
Although Uganda trimmed its key lending rate by 50 basis points in December, it was by a smaller amount than the rate rise in September.
"The Bank of Uganda is expected to keep an unchanged policy stance in the next few months, but it emphasized its willingness to tighten policies if incoming data suggest a rise in core inflation," the IMF said.