Uganda's underlying inflation target of 5 percent by June this year is within reach despite pressure from power shortages, drought and volatile global oil prices, a local report has said.

Uganda's underlying inflation (excluding food) remained unchanged at 5.1 percent in March, indicating it will be contained below 5 percent by the middle of this year though high oil prices still remain a risk, according to Stanbic Investments Management Services' (SIMS) April report quoted by the New Vision daily on Wednesday.

The market report said severe drought, which caused a hike in domestic food prices and continuing power shortage that increased production costs pushed the overall inflation rate to 7.9 percent at the end of March.

It said inflation pressures are expected to feed into Treasury Bill (TB) rates in the medium-term though the rates have been on a downward trend. The benchmark 91-day TB rate edged lower to 7.45 percent in February from 7.61 percent in January.

However, SIMS expected the exchange rate to stabilize in the next few months, though it will be under pressure from inflation and lower than projected export earnings due to drought.

The Ugandan shilling has edged lower against the U.S. dollar as corporate players return to the market.

It also said the cancellation of multi-lateral foreign debts by the World Bank and International Monetary Fund (IMF) will create fiscal space for the government to spend more money on education, health and infrastructure.

This comes against a background of macro-economic stability that will be sustained by the IMF's multi-year Policy Support Instrument (PSI).

The PSI, which will be discussed by the government and the IMF, will focus on the structural reforms that are required to implement the revised Poverty Eradication Action Plan.

"These reforms include structural measures that are set to boost private sector activity, reduce business costs and improve Uganda's competitiveness. One urgent item on the structural agenda is the electricity shortage," the report said.

Source: Xinhua