The International Monetary Fund (IMF) last month predicted a slowdown in the global economy this year from 3.8 per cent to 3.6 per cent.

This is consistent with the World Bank’s prediction of slow growth for sub-Saharan Africa (SSA) to 3.7 per cent this year, its weakest pace since 2009, mainly due to the drop in commodity prices. So what do these grim forecasts mean for Uganda?

The IMF and WB reports show that Uganda is, like any other country that trades in commodities, likely to suffer economic contraction below five per cent to about four per cent.

The reduced commodity export prices for Uganda for its traditional exports like coffee, cotton, and flowers as result of the economic crisis in Europe, though temporary, has greatly affected Uganda’s foreign exchange inflows and caused instability in the exchange rate market.

Accompanied with high domestic demand for dollars by foreigners in the market as they repatriate their earnings back home and also by domestic importers, this has caused high deprecation pressures on the domestic currency.

We see prices rising due to expensive imports. With the continued demand for dollars in the market and reduced export revenues, inflation is likely to continue rising.

This will force the central bank to maintain the increases in interest rates until the inflation is moderated to the target single-digit levels. Higher interest rates on credit resulting from the central bank intervention has a negative impact on investment, and overall demand for goods and services in the economy, thus a reduction in economic growth.

Further increase in interest rates could hurt Uganda’s economic growth through reduced private sector investment. In order for Uganda to regain a positive economic growth path, as observed by the World Bank (WB), the country should aim at implementing the right policies to boost agricultural productivity and reduce electricity costs.

Uganda’s cost of doing business remains among the highest in Africa, although there has been some improvement. The WB, however, observes that there are lessons to be drawn from countries such as Cote d’Ivoire, Ethiopia, Rwanda, Mozambique and Tanzania which are still expected to grow robustly, posting about seven per cent or more.

While Uganda has potential to post similar growth, the policy response to agriculture transformation and industrialization remains very weak. In addition, there is still limited access to development financing.

 The author is a researcher at Economic Policy Research Center (EPRC), Makerere University

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