* Economy seen growing 5 pct in 2012/13
* Interest rates were hiked to fight inflation
* Fight against graft must be toughened
KAMPALA, Jan 15 (Reuters) - Uganda's tight monetary stance to combat inflation has sharply slowed economic growth but medium-term growth will reach its potential level of 6 percent to 7 percent, the International Monetary Fund (IMF) said.
East Africa's third biggest economy jacked up interest rates in the second half of 2011 to fight soaring prices as inflation peaked at over 30 percent. It then launched a run of monthly growth-boosting rate cuts in June last year, which it paused for the first time this month with inflation at 5.5 percent.
Although inflation has been brought under control, economic expansion is comfortably below its potential growth rate of about 7 percent, the central bank has said.
"Reviving economic activity is therefore an urgent priority for Uganda's low-income economy," the IMF said in a statement late on Monday.
"To this end, the authorities' short-term policies are appropriately geared at maintaining essential public investment and encouraging a gradual resumption of bank lending, while continuing to allow the shilling to reflect market conditions."
The IMF forecast in November the Ugandan economy would grow 5 percent in the 2012/13 fiscal year from 3.4 percent in the previous period.
The Washington-based body also said the recent theft of donor funds by Ugandan officials, which led to some donors suspending aid, signalled the need for a more radical fight against graft.