Uganda's economy is projected to rebound in 2006/2007 following increased investments in the energy sector but the hiking power tariffs which pass on to consumers still poses a risk of inflationary pressures, an International Monetary Fund official has said.

"Solving the energy crisis is important not only for the manufacturing sector but also in sustaining Uganda's pattern of economic growth," said Peter Allum, the outgoing IMF resident representative, quoted by New Vision on Saturday.

"However, manufacturers will have to pass on costs for power hike to consumers, which will create inflationary pressures," Allum said.

He noted that the government expenditure as a percentage of GDP had risen to 22.5 percent, its highest level in years, from 21.3 percent in 2005/2006, reflecting increased spending on energy.

"Although spending is rising faster than the available resources due to the energy crisis, the pressure on the budget is likely to be temporary," he said.

According to Allum, the risk to the budget is a shift from public saving to borrowing, which will crowd out the private sector credit.

"The government will want the central bank to issue more Treasury Bills to finance the budget, which will put pressure on interest rates and crowd out private sector credit. However, to manage this process, the central bank will need to shift to more foreign exchange sales," he said.

Allum said the trend in donor financing shows that while support for projects is strong, cash financing for the budget is on a downward trend. "Donor funding is projected to fall to 39 percent of budget resources from 42 percent in the last two years, " he added.

He said the IMF would continue working with the government to achieve the 2006/2007 budget goals and strengthen revenue collections.

Source: Xinhua