By Sylvia Jjuuko
Ugandaâ€™s economy looks set to continue as one of Africaâ€™s fastest growing despite less demand for its products abroad and tighter global credit conditions, according to the International Monetary Fund (IMF) data released on Tuesday.
In its annual review of Ugandaâ€™s economy, the IMF forecast economic growth is likely to stay in the 7% range before climbing to 8% in 2011/12 (July-June) and 2012/13 fiscal years.
Much of the growth reflects the discovery of oil in western Uganda, which has boosted investor interest.
Still, the IMF cautioned, the global economic slump will pose challenges for Ugandan economic activity going forward.
Strong private capital inflows, which allowed Uganda to build its currency reserves in 2007/08, have abated and reserves are expected to drop slightly as demand for exports falls and other inflows, including remittances and foreign direct investment, decline.
Ugandaâ€™s financial system has been relatively insulated from the global financial crisis, but the economic slowdown could expose weaknesses in banksâ€™ credit portfolios, the IMF said
Central bank governor Tumusiime Mutebile had already warned that the global recession would slow down Ugandaâ€™s economic growth by 3%.
â€œThe effect on the economy will be a reduction in growth rates from 9.5% projected at the time of the budget to between 6-7%,â€ he said. â€œCompared to Africaâ€™s projected growth of 3%, Uganda can still be proud of its growth performance.â€
The IMF was confident that the economy was well-positioned to face these challenges given its low public debt, comfortable level of international reserves and relatively sound banking sector.
It predicted that core inflation will benefit from the drop in international food and fuel prices, falling to about 7% by June 2009. The current annual core inflation rate, which excludes food crop items, fuel and electricity, was recorded at 13.4% at the end of January.
Mutebile last year explained that Ugandaâ€™s financial sector was insulated against the credit crunch due to prudent risk-based banking supervision and their non-exposure to bad assets.
But he warned that a global recession would impact on Ugandaâ€™s remittances from abroad, export earnings and aid inflows.
Mutebile said the immediate impact was fluctuation in the foreign exchange market that has seen the shilling depreciate against the dollar. The shilling fell from 1,640/50 per dollar in August 2008 to 1960/1970. Companiesâ€™ share price also plummeted at the bourse.
While the IMF welcomed the Governmentâ€™s new National Development Plan to scale up investment in infrastructure, it suggested that projects should be carefully evaluated including their impact on the countryâ€™s debt and international reserves.
It called on authorities to avoid steep cuts in current expenditures, to strengthen expenditure management and prevent further accumulation of domestic arrears.
The IMF urged the Government to increase tax revenues by 0.5% of GDP annually.
The Fund welcomed governmentâ€™s consideration of introducing a fiscal rule, which would help manage the countryâ€™s oil revenues.