IMF warns Uganda on inflation

KAMPALA - Uganda should stagger its planned energy and transport projects to avoid fuelling inflation and hogging bank credit, an International Monetary Fund (IMF) official told Reuters on Thursday.

A prospective crude producer, Uganda is at various stages of implementing several multi-billion dollar infrastructure projects, including two hydropower dams, a refinery, express highways and a railway line.

The projects, officials say, are vital for maximising benefits from the burgeoning hydrocarbons industry and removing bottlenecks to industrialisation.

IMF's Senior Resident Representative in Uganda, Ana Lucía Coronel, said such massive infrastructure spending would spur a surge in aggregate demand.

"So there's a need to sequence project execution over a period of time to make sure that the economy can absorb the investments," she said.

"If the investments are too large for the size of the economy, there could be ... inflation or a crowding out of private sector activity."

Some analysts and legislators have asked whether Uganda, with an estimated $21 billion GDP and total external debt of $6.5 billion as of March 2014, could afford taking on all the debt needed to finance these large-scale investments.

"How much borrowing is going to be needed?" Coronel asked. "That is a key consideration that needs to be taken into account very seriously.

Debt at the moment ... should be kept at low risk of distress."

Ambitious Projects

In the second half of last year Uganda handed out contracts worth a combined $2.1 billion to Chinese companies to develop two hydro powers on River Nile expected to generate 788 megawatts between them.

China's Exim bank is financing both projects via concessional loans although the Uganda government is also expected to provide part of the funds through direct budget allocation.

President Yoweri Museveni has said Uganda is negotiating with China for a loan to fund an $8 billion standard gauge railway.

The line is planned to stretch from its border with Kenya to the capital Kampala, with an arm running north to the border with South Sudan.

Uganda expects to start pumping crude oil from its Albertine rift basin in 2018. To process that crude, the government is planning to develop a refinery, projected to cost $2.5 billion.

The government needed to conduct a careful review, Coronel said, to determine "whether these projects are economically and financially viable."

The railway project, to be built by China Harbour Engineering Corporation (CHEC), has been particularly criticised by legislators who say its cost is hugely inflated.

This week parliament resolved to set up a special committee to probe irregularities surrounding the project including how the contractor was procured.

Reuters

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