* Uganda depends on aid for a quarter of annual budget
* Promises audits, freeze on assets of corrupt officials
By Elias Biryabarema
KAMPALA, Jan 11 (Reuters) - Uganda expects foreign donors to restore aid which makes up a quarter of its budget after the government pledged to refund stolen and embezzled funds and to prevent future pilferage, it said on Friday.
Major western donors including Britain, Uganda's biggest bilateral source of aid, suspended their financial support to the east African country toward the end of last year after allegations $13 million worth of aid had been embezzled.
The money was meant for financing reconstruction projects in the north and northeastern parts of the country, ravaged by years of a rebellion by the Lords Resistance Army.
"We're confident that with all the measures we've taken donor disbursements will resume in the second half of this year," Keith Muhakanizi, deputy secretary at Ministry of Finance told a news conference, referring to the fiscal year that ends on June 30.
"We're fully engaged with donors on a day-to-day basis and our reforms will trigger release of (aid) funds."
Renewed aid would support the shilling currency which hit a 14-month low last week. The Ugandan economy depends heavily on the donations as a source of foreign currency.
Muhakanizi said the government had started removing loopholes in public finance laws that encouraged fraud, conducting special audits in six big-spending ministries and freezing assets of officials accused of embezzling funds.
The government has previously said the cuts would leave it about $260 million short of the money it needs to cover planned 2012/2013 spending. The central bank says the aid freeze will shave 0.7 percent off Uganda's economic growth.
Last month, ratings agency Standard and Poor's affirmed its B+ and B long- and short-term sovereign credit ratings respectively for Uganda but downgraded the country's outlook to negative from stable, citing strained relations with donors.
Uganda has reimbursed Ireland 4 million euros ($5.3 million)worth of stolen aid and Muhakanizi said a total of 38.3 billion shillings ($14.2 million) had been raised through a supplementary budget to refund all donors who alleged their aid was embezzled.
Angelo Izama, a Ugandan analyst at the U.S.-based Open Society Foundation, described the idea of using taxpayer money to refund stolen aid as "bizarre" since it was not taxpayers who had embezzled the aid.
"Secondly, since the government can quickly marshal all this money to pay donors, the implication is that government has money and actually doesn't need aid," he said.
Officials say the money will be taken directly from government funds. ($1 = 0.7568 euros) ($1 = 2700.0000 Ugandan shillings) (Reporting by Elias Biryabarema; Editing by George Obulutsa/Ruth Pitchford)