Ugandan central bank says drop in foreign aid creates economic uncertainty

by Reuters
Tuesday, 4 March 2014 10:55 GMT

* Central bank keeps lending rate at 11.5 pct

* New anti-gay law led some donors to withdraw aid

* That has pressure the shilling

* Cbank says it will continue to intervene (Adds details, background)

By Elias Biryabarema

KAMPALA, March 4 (Reuters) - Uganda's central bank held its key lending rate at 11.50 percent on Tuesday, but said a decline in foreign aid was a source of uncertainty for the economy.

The Ugandan shilling has come under pressure since some Western countries and funding agencies announced aid cuts last week in response to President Yoweri Museveni's signing of an anti-homosexuality law.

Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said the bank would continue to intervene in the foreign exchange market to stem volatility as it had sufficient reserves to do so, amounting to about $3 billion.

"The magnitude and timing of possible declines in foreign aid are also a source of uncertainty for the balance of payments and the economy," Tumusiime-Mutebile told a news conference.

"We only intervene when we think it's necessary and the bank has adequate foreign reserves to intervene in our markets whenever necessary."

Announcements by Denmark and Norway that they would withhold aid, and threats by the United States and other Western countries to review relations and financial support following passage of the law, have spurred investors to buy hard currency.

The central bank has held its key lending rate since cutting it to 11.50 percent in December.

Tumusiime-Mutebile said on Tuesday that there was potential risk from higher inflation especially from the shilling's depreciation and high food prices.

The year-on-year inflation rate dipped to 6.7 percent in February from 6.9 percent a month earlier, pushed lower by a slowdown in non-food costs.

Tumusiime-Mutebile said core annual inflation would be in the 4-5 percent range in the next few months, and increase to between 5.5 percent and 6.5 percent over the next 12 months.

The World Bank last week postponed a $90 million loan to Uganda's health system over the law that toughened punishment for gays, imposing a life sentence for certain violations and making it a crime to not report anyone who breaks the law.

However, some analysts said the impact of aid cuts was being exaggerated and that donors were likely to divert their aid to civil society organisations rather than cut it off entirely.

Others also note that China, which has increasingly emerged as Uganda's primary source of external support, has not followed Western donor pressure on Uganda, which they said should offset some of the worries over the impact of aid cuts.

The Ugandan economy, east Africa's third-biggest, is forecast to grow 6.2 percent this year, up from an estimated 5.6 percent in 2013, due to large infrastructure development, according to a Reuters poll.

The country is on the cusp of a petrodollar-fuelled boom after commercial hydrocarbon deposits were struck along its border with the Democratic Republic of Congo in 2006. Production is seen commencing in 2016 at the earliest. (Writing by George Obulutsa; Editing by James Macharia and Susan Fenton)

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