Uganda's economy continues to perform below par thanks to persistent high lending rates, weak export performance and infrastructure gaps — rendering its seven per cent growth target elusive since 2012.

Lending rates have averaged more than 20 per cent over the past three years, amid high costs of funding experienced by banks, observers say.

Whereas Uganda’s economy grew by five per cent against a target of 5.8 per cent during 2014/15, down from 5.7 per cent against a target of 6.2 per cent in 2013/14, Bank of Uganda (BoU) data shows.

The World Bank now projects growth between five and 5.5 per cent during 2015/16 in light of depressed investment flows attributed to uncertainty over election campaigns.

“A noticeable slowdown in investments may be felt during the pre-election period as investors stay away... Continued suspense surrounding the US Fed’s intentions of raising interest rates will force BoU to adopt a ‘wait and see’ attitude before intervening in the forex market as a result of depleted stabilisation resources,” said Rachael Kaggwa Sebudde, lead economist at the World Bank Uganda country office.

A large current account deficit caused by surging imports pegged to large infrastructure projects and depressed exports is expected to put further pressure on the shilling, observers say.

The country’s current account deficit increased from 7.9 per cent of gross domestic product in 2013/14 to 8.8 per cent of GDP in 2014/15 while total export revenues fell by 2.8 per cent to $680 million at the end of June. The Ugandan shilling lost 24 per cent against the greenback during 2014/15, according to World Bank data — a trend that saw the former hit Ush3,300 in June amid increased capital flight caused by investor worries over economic stability prior to next year’s general election.

A weaker shilling directly translates into higher import expenses incurred by government and private enterprises and increased core inflation — an official  gauge of price changes in foreign sourced goods and services.

Rising interest rates triggered by steep increases in the Central Bank Rate (CBR) witnessed since June have raised risks of “crowding out” for the private sector and increased interest payments incurred by government on domestic debt; a trend that could translate into muted economic growth.