Uganda growth defies global slump; risks rise -IMF

WASHINGTON, Feb 17 (Reuters) - Uganda's economy looks set to continue as one of Africa's fastest growing despite less demand abroad for its products and tighter global credit conditions, according to International Monetary Fund data released on Tuesday.

In its annual review of Uganda's economy, the IMF forecast economic growth in Uganda is likely to stay in the 7 percent range before climbing to around 8.0 percent in 2011/12 (July-June) and 2012/13 fiscal years.

Much of the growth reflects the discovery of oil in the west of the country, which has boosted investor interest in the East African nation.

Still, the IMF cautioned the global economic slump will pose challenges for Ugandan economic activity going forward.

Strong private capital inflows, which allowed Uganda to build its currency reserves in 2007/08, have abated and reserves are expected to drop slightly as demand for exports falls and other inflows, including remittances and foreign direct investment, decline.

Uganda's financial system has been relatively insulated from the global financial crisis, but the economic slowdown could expose weaknesses in banks' credit portfolios, the IMF said, urging increased vigilance over the banking system.

The IMF welcomed the government's plan to scale up investment in infrastructure but said the authorities should carefully evaluate the projects, including their impact on the country's debt and international reserves.

The IMF urged some fiscal stimulus to offset tougher conditions. Over the medium term, the IMF said Ugandan authorities should increase tax revenues by 1 percent of gross domestic product annually. It welcomed the government's proposal to introduce a fiscal rule, which would help properly manage the country's oil revenues.

Meanwhile, the IMF said monetary policy should aim at "sustaining confidence in the currency while supporting the disinflation process". It also said the authorities should seize the opportunity of lower oil and food prices to reduce inflation to its medium-term target. (Reporting by Lesley Wroughton; Editing by Leslie Adler)