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By Elias Biryabarema
KAMPALA, Oct 6 (Reuters) - The World Bank cut its 2016/2017 growth forecast for Uganda on Thursday to 5.5 percent from 5.9 percent, citing the impact of South Sudan's conflict on its exports and sluggish investments due to slower economic activity globally.
South Sudan is one of Uganda's major export markets but roads between the two countries have been unsafe since an eruption of violence in South Sudan in July.
"The current economic forecast ... is ... mainly because the economy has responded less strongly to the post-election monetary easing, as investments remain sluggish under a slower global economy and the negative impact of the South Sudanese conflict on Uganda's exports," the bank said.
However, a rebound in activity in the construction sector, driven by aggressive public infrastructure investments will offset the effects of a "weak external sector" and return growth to above 6 percent in the 2017/2018 July to June fiscal year, the bank said in an emailed response to Reuters questions.
Ugandan officials have said a quicker pace in oil-related investments as the country prepared to start crude oil production in 2020 will also help accelerate growth.
Crude oil was discovered in Uganda 10 years ago but commercial production has been repeatedly delayed by spats over taxation and disagreements over development strategy.
This year the government has given out new exploration licences and also production licenses to operators including Total, Tullow Oil and China's CNOOC
The World Bank said those steps will "accelerate foreign direct investment flows, infrastructure development, employment and local industry".
It warned of higher risks of debt distress if revenue collection did not pick up, or if the infrastructure projects failed to lift economic growth.
"Continued failure to collect revenue in the context of a rapid fiscal expansion could increase the risk of debt distress," it said.
"Moreover, if the investments in infrastructure do not result in an improved rate of growth, or if they are delayed significantly ... this could also result in rapid increases to the debt-to-GDP ratio, most likely to a level in excess of the threshold of 50 percent of GDP."
Last month the World Bank said it had decided to suspend the release of outstanding funds to Uganda while it reviewed performance on previous loans.
The bank has not disclosed how much funding was frozen.
Uganda relies heavily on aid - both grants and subsidised credit - for its public spending and the World Bank is one of its major sources.
Funds from the multilateral lender have been vital in financing major projects in sectors such as energy and transportation infrastructure but also an important source of foreign exchange in a country whose export sector is still relatively small.
Embezzlement and wasted aid is common in Uganda and the World Bank and other donors, including the European Union have previously suspended aid on similar grounds. (Editing by George Obulutsa and Louise Ireland)