afrol News, 31 October - Uganda's economic growth is expected to slow down due to mainly two major shocks, of sharply rising inflation as well as global economic downturn, IMF has said today.

Fund's mission which concluded its visit to Kampala today, for consultations on review of fourth policy support instrument, has observed that despite a health growth level, country has not been able to maintain inflation at target mainly because of fuel and food price surge.

"First, inflation has risen sharply over the past nine months and has remained persistently above the Bank of Uganda's target, mainly as a result of the pressures from the international fuel and food price surge. Second, the sharp global economic downturn, the magnitude of which is still uncertain, cannot but have an impact on Uganda's small, open economy, mainly through reduced demand for its exports and a slowdown in the inflow of foreign investment," IMF mission in a statement.

Mission which has been in Uganda from 20-31 October, stated that global slowdown will further be a huge challenge for Uganda to increase its revenue, advising east African nation to sustain critical spending, especially on infrastructure projects aimed at country's medium-term growth.

"Monetary policy will need to be guided by the objective of returning core inflation to 5 percent. The decline in international food and fuel prices, if sustained, will help. However, in the short term, the lingering impact of earlier price rises and the effects of recent depreciation of the shilling will delay the achievement of the inflation objective. In the meantime, the Bank of Uganda will need to continue to restrain liquidity growth, while ensuring that sufficient credit is available for the private sector," IMF said.

Fund's mission also urged that fiscal policy should be directed for use of any available scope to cushion a temporary revenue shortfall, guided by medium-term macroeconomic stability considerations.

"The international environment can be expected to be more challenging in the coming years, which may affect the financing of investment projects, underscoring the need to ensure value for money in public spending. But provided Uganda maintains its growth momentum, its strong economic fundamentals should allow it not only to weather the storm, but to emerge stronger from it," said IMF in a statement.

According to fund's mission, Uganda's economy continued to perform strongly in 2007/08, reaching 9.75 percent, fueled in particular by a robust expansion in the construction and services sectors. Exports are also said to have grown by over 50 percent, contributing to a further increase in international reserves of Bank of Uganda, while fiscal policy remained prudent, anchored by strong revenue performance, and expanding credit to private sector at a record pace.

However, IMF staff estimates economic growth to slow, albeit to a still healthy 7-7.5 percent in 2008/09 fiscal year, further saying there are no indications that Ugandan banking sector has any direct exposure to toxic debt that has affected global financial markets, and banking soundness indicators appear healthy. "Nonetheless, going forward, it will be important to step up prudential supervision to ensure that any emerging risks are identified early and addressed expeditiously," said IMF statement.

IMF is expected to carry further discussion with Uganda, on consultation and fourth review under PSI in early January 2009.

By staff writer

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