Uganda economic growth seen gaining steam next year

JOHANNESBURG - Uganda's economic growth should pick up steam next year after slowing this year as high inflation and interest rates squeeze consumption and investment infrastructure spending.

The landlocked nation's economy will grow 4.8 percent this year and 6.4 percent next, the poll of 10 economists found, slower than the 6.2 and 7.0 percent anticipated in February.

"We believe GDP growth will have bottomed out in the first half of 2012 with capital investment leading the acceleration in economic activity over the next 18 months," said Mark Bohlund, senior economist at IHS Global Insight.

More recently though, East Africa's third-biggest economy has struggled with excessively high inflation, which hit an 18-year high of 30.4 percent in October, robbing consumers of disposable income.

As prices sky-rocketed, the Central Bank of Uganda implemented a very tight monetary policy, largely to the detriment of economic growth.

"Very high inflation and tight monetary policy have constrained economic growth over the first part of 2012, adversely affecting consumption and investment," said Gregan Anderson, analyst at Business Monitor International.

Interest rates in rich nations are languishing near zero as they try to stimulate depressed economic growth, while Uganda's benchmark rate is among the highest in the world at 19 percent.

The shock treatment of high interest rates has so far been effective as the consumer price index slowed for the fourth straight month in June to 18 percent on a year-on-year basis from 18.6 percent in the previous month.

Still, Uganda's inflation is likely to remain in double digits this year with the poll forecasting inflation to average 16.7 percent in 2012 but easing to 8.2 percent next year.

FALLING INTEREST

Analysts expect interest rates to start normalising towards the end of the year as inflation slows, harnessing the spending power of the 33 million population whilst allowing the government to continue with its infrastructure programmes.

"This should be led by investment into the energy sector with residential construction and private consumption joining in following the normalisation of inflation and interest rates," said Bohlund.

Uganda's economy grew 2.4 percent in the first quarter of 2012 after declining 2.6 percent in the previous three months, driven by growth in the industrial, construction and manufacturing sectors. It grew 6.3 percent in the fiscal year to end-June 2011, official data showed.

In Kenya, East Africa's biggest economy, growth is expected to have fared much better despite the country also having high inflation.

Its economy is expected to expand 5.0 percent this year and 5.6 percent next, benefiting from good trade links with other east Africa bloc members rather than the traditional export destination of Europe, which is struggling with a debt crisis.

On the west coast, Africa's top oil producers Nigeria and Angola, are jostling for the number one spot and are expected to register robust growth as oil prices hover around $100 per barrel. Nigeria could grow 7.0 percent and Angola 9.1 percent.

Uganda is also preparing to kick off its own oil production next year, which could catapult its growth forecasts, making it part of the elite league of oil exporters that grow close to 10 percent a year.

Its plans to become a top 50 oil producer are now back on track after Tullow Oil said it had signed a delayed deal, bringing China's CNOOC and France's Total in to develop the country's oil resources.

Finalisation of the deal will start a $10 billion investment project involving a new refinery and other key infrastructure to enable commercial crude production.

 Reuters