Uganda’s economic growth should accelerate to just above 6 percent in the next fiscal year through June 2015 despite the risk of reduced foreign aid and unrest in key export market South Sudan, the IMF said on Tuesday.
Western donors have halted or re-directed about $118 million in aid to Uganda since President Yoweri Museveni signed a law in February which toughened existing rules against gays.
Analysts have said that the east African economy has become less dependent on aid for budget support in recent years, but the IMF said reduced foreign aid made it even more important for the country to expand its tax base.
“Following the recent large shortfall in tax revenue and the risk of reductions in foreign aid, broadening the tax base and improving efficiency in tax administration are more critical than ever,” the International Monetary Fund said in a statement.
Tax revenues have lagged as economic growth has been slower than expected this fiscal year although the IMF said the economy was still solid.
“Despite a slowdown in agriculture and unrest in South Sudan, growth continues to be robust,” it said.
Neighboring South Sudan has been experiencing violence since last December, disrupting trade between the two nations.
Ugandan exports to South Sudan include food, plastics, beverages and construction materials.
The IMF said that Uganda needed to curtail its public spending to relieve pressure on credit markets and spur lending to the private sector.
“Restrained public consumption in the upcoming year … would create room for improved credit conditions, laying the ground for a rebound in private sector activity,” it said.
The IMF’s projections for economic growth of 6.1 percent in the 2014/15 fiscal year, and 5.7 percent in the current fiscal year, broadly match those of the Ugandan central bank, which predicts growth will reach 6.0-6.5 percent in 2014/15. The bank this month cut its forecast for growth this fiscal year to 5.7 percent from 6 percent.
Boosting tax collections and curbing public spending, the IMF said, would help limit government borrowing in the domestic market, keeping a lid on interest rates.
Interest rates have been on hold since the central bank unexpectedly cut its benchmark rate by 50 basis points in December to 11.50 percent, saying economic growth was below potential.