KAMPALA (Reuters) - The European Union (EU) has become the latest donor to suspend aid to Uganda alleging the embezzlement of $13 million in aid funds by officials in the Prime Minister's office.
The EU joins Britain, Germany, Ireland, Denmark and Norway which have already frozen funds to the east African nation.
Uganda's government has said it is determined to punish all the officials involved in the theft of money meant to help fund the recovery of northern Uganda, ravaged by the Lord's Resistance Army's two-decade insurgency.
Aid funds up to a quarter of the national budget.
The withholding of funds has also hurt the Ugandan economy through the shilling currency which has lost close to 4 percent of its value against the dollar, raising import costs, since Ireland first cut its aid in late October.
Central bank Governor Emmanuel Tumusiime-Mutebile told a news conference on Tuesday: "If all donors being reported to have cut their aid do cut their aid, we think that this will reduce the potential (economic) growth rate by about 0.7 percent."
Donors say a culture of impunity thrives at the heart of government for cronies of Uganda's long-serving President Yoweri Museveri.
"The recent corruption scandals and misappropriation of funds in the government of Uganda are a breach of trust," Roberto Ridolfi, the EU's ambassador to Uganda, told civil society groups in Kampala late on Monday.
EU officials in the Ugandan capital declined to say how much aid the bloc was withholding. Ridolfi said it would not pay out funds destined for budgetary support over the next six months until Uganda took steps towards combating graft.
External financing was expected to account for roughly a quarter of Uganda's 11.2 trillion shillings ($4.2 billion)budgetary spend this fiscal year (July-June), the 2012-2013 budget showed.
Cuts to budgetary assistance could hurt public investments in health and education.
Ridolfi said the EU would initially suspend aid for six months, giving the Ugandan government time to return the stolen funds to donors, create a more robust public finance system and prosecute officials guilty of theft.
"For the EU in practical terms this means that funds earmarked as EU budget support to the Ugandan fiscal year 2012-13 will not be paid until satisfactory progress has been confirmed on the points above," Ridolfi said in his speech.
Uganda's leading Daily Monitor newspaper on Tuesday quoted Ridolfi warning that "Ugandan citizens are going to lose close to $300 million in budget support" from eight development partners.
At least 12 officials have been suspended since the country's attorney general released a report in October revealing the funds were missing.
($1 = 2680.0000 Ugandan shillings)
Reporting By Elias Biryabarema; Writing by Drazen Jorgic; Editing by Richard Lough/Ruth Pitchford