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KAMPALA, Uganda, Capital Markets in Africa — The International Monetary Fund (IMF) revised Uganda’s growth forecast for the 2015/16 (July-June) fiscal year to 5 percent from the 5.8 percent it predicted in May, according to the press statement released by the IMF on November 18 2015.
The Fund attributed the cut in GDP to the global and regional challenges, compounded by election-related uncertainties, the shilling depreciated sharply, driving an increase in inflation (annual core inflation reached 6.3 percent in October and is expected to rise).
The Washington based Fund said that the external current account deficit widened in FY2014/15 and is expected to expand further as a result of high infrastructure-related imports, stagnant exports, and weak tourism receipts stemming from the difficulties in neighboring countries. However, international reserves remain at comfortable levels. Supported by public investment, real GDP growth reached 5 percent in FY2014/15 and is expected to remain at that level in FY2015/16—below initial projections reflecting tight credit conditions and a smaller-than-expected fiscal stimulus.
Furthermore, the fund commended the Bank of Uganda’s tightening policies in response to rising inflation. The Bank of Uganda has since April increased the central bank rate by 600 basis points, bringing it to 17 percent, and also improved the modality of foreign exchange purchases in the market. As a result, inflation expectations and pressures in the foreign exchange market are subsiding. The central bank also continues to monitor the financial system, which remains sound despite increased vulnerabilities.
On the fiscal front, the authorities have decided to reduce by 0.55 percent the budgeted fiscal expansion through spending cuts. The revised overall deficit, projected at 6.5 percent of GDP compared to 7 percent in the budget, is expected to contribute to price stability and policy credibility; and together with tax administration improvements, will lower the size and cost of domestic security issuances. To ensure that debt remains at low risk of distress, the authorities have re-profiled medium-term infrastructure projects by postponing investments. Strong fiscal-monetary policy coordination and effective communication remain essential to boost policy efficacy and credibility.
Over the medium term, achievement of inclusive growth critically depends on enhancing tax collections—still low by international standards—diversifying exports through gains in productivity and competitiveness, pursuing financial deepening to improve access to credit, improving governance, and strengthening social protection.