By Elias Biryabarema
KAMPALA, May 16 (Reuters) - The International Monetary Fund cut its forecast for Uganda's growth for the fiscal year ending next month to between 3.5 and 4 percent from 5 percent on Tuesday, blaming drought and slow credit growth.
Growth would return to around 5 percent in 2017/18, assuming weather conditions and credit flows improved, the Fund said in a statement.
But a range of factors, also including slow progress on public infrastructure investments, were weighing on the current data, it added.
"The drought held back activity in the first part of the year. Private sector credit is an additional drag," the statement said.
Poor rains have cut harvests and left widespread food shortages across East Africa for more than a year.
The central bank last month trimmed its benchmark rate to 11 percent, the seventh cut in a row to try to spur faster flow of credit.
But a recent surge in non-performing loans had forced banks to tighten lending standards, squeezing the flow of credit, the IMF said.
According to the latest data available from the central bank, the banking industry's non-performing loans rose to 10.5 percent of the total loan portfolio in December, up from 7.7 percent in September.
The government is building two hydropower dams, motorways and a standard-gauge railway to replace a narrow-gauge line built a century ago.
Most of the projects are financed with credit from China, which has lately emerged as Uganda's biggest source of credit. (Reporting by Elias Biryabarema; Editing by Andrew Heavens)