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Uganda's central bank cuts 2015/16 growth projection again

By Reuters | February 10th 2016

Uganda's central bank has cut its 2015/2016 (Jul-Jun) economic growth projection for the second time, with output seen further curbed by weak export markets and a tight policy environment, the bank's governor said on Wednesday.

Governor Emmanuel Tumusiime-Mutebile told Reuters growth in 2015/16 would now be 5 percent, down from the 5.4 percent forecast in August.

He attributed the trimming of growth forecast to "the difficulties in the external economic environment and especially in export markets," and the need to tighten monetary and fiscal policy to curb inflationary pressures.

Uganda mostly exports commodities like coffee, cotton, tea, tobacco and fish but officials have been worrying the global decline in commodity prices and the turbulence in the Chinese economy could drive down the country's export earnings.

Tumusiime-Mutebile said the bank expected the growth rate to rebound in 2016/17 to 5.5 percent, fuelled by strong domestic demand.

The August forecast was also lower from the original projection of 5.8 percent and the governor had also cited the impact of last year's aggressive monetary policy tightening.

During the year, authorities raised the benchmark central bank rate (CBR) by a total of 600 basis points to 17 percent, aiming to stem inflationary pressures driven by a weak local currency.

Tumusiime-Mutebile said the central bank believed last year's tightening was sufficient to keep core inflation contained but that it would hike interest rates if signs of a price surge re-occured.

In December BoU said it expected core inflation, the bank's key target, to peak at 10 percent in the third quarter of 2016 before decelerating back to their target of 5 percent.

A CBR hike would occur, he said, only if "our updated forecast of inflation indicates that it will rise above the current forecasted levels ... or if higher inflation will persist for longer."

The central bank's next monetary policy committee meeting is due on February 15.

The governor projected Uganda's current account deficit, which economic analysts said was partly behind last year's sharp shilling depreciation, would slow to just under $2 billion in 2015/16, from $2.3 billion the previous year.

"We are projecting a small narrowing of the trade deficit... because real exchange rate depreciation has curbed import growth," he said.

The value of Uganda's oil imports, too, had fallen on the back of a drop in crude prices, he said, and that would further help in cutting the trade deficit.

But import growth is likely to "recover strongly" and widen the deficit to $2.7 billion in 2016/17.

Finance ministry officials expect Uganda's import bill to balloon in the coming years due to the construction of various infrastructure projects, including two large hydropower dams and a crude refinery.

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