The Uganda shilling retreated to within touching distance of a 17-month low last week, weighed down by the shipment abroad of profits by foreign-based multinationals such as mobile phone operator MTN and banking giant Stanbic.
On Thursday, the shilling had dropped to 2,667 for each dollar, taking it close to its February 2013 low of 2,670 per dollar, according to data sourced from Thomson Reuters. By Friday afternoon, the shilling had edged back slightly to 2,664.52 per dollar (buying) and 2,674.52 (selling), which was still within range of its lowest figure in about a year and a half.
The demand for the dollar in Uganda has risen in the last few weeks as multi-national corporations that are headquartered outside Uganda make dividend payouts, according to Catherine Bulinda, the chief manager of Treasury at Centenary Rural bank.
"Demand for the dollar has mainly been driven by corporations like MTN, Stanbic, etc, making dividend payments, purchases from the oil and energy sectors, and the usual importer demand," she said.
Stephen Kaboyo, the managing director at Alpha Capital, also attributed the fall in the shilling to demand for the dollar by telecoms, but added that a combination of other factors had played a role too.
"The shilling has depreciated sharply in the past couple of weeks, extending its losing streak to a second successive week, undermined by an upsurge in demand from mostly the telecoms and the possible pullback in portfolio flows on account of less attractive yields on Uganda's fixed income instruments," he said.
James Mutuku, the head of financial markets at Standard Chartered bank Uganda, also attributed the depreciation of the shilling to "a surge in corporate demand plus unattractive yields on Ugandan assets."
When the yields on Uganda's treasury bonds and bills are unattractive, offshore investors take their dollars to other markets, leaving behind a battered shilling. In its June 2014 Monetary Policy Report, the Bank of Uganda noted that recent fluctuations have been as a result of the investor perceptions of the market as demand for dollars rises.
Global perception
"The depreciation of the exchange rate on a monthly basis is predominantly a result of evolving global risk perception. The exchange rate may have also been affected by domestic factors, however, including the persistent current account deficit," said the report.
A weak shilling supports exports as traders earn more money in exchange for the dollars they bring to the country, but makes imports more expensive. And with Uganda depending heavily on imports, a weak shilling comes with negative effects for the economy. One of the first impacts could be a surge in inflationary pressures. The price of goods and services could shoot up if the shilling continues its downward spiral.
A further slump of the shilling could dampen Bank of Uganda's efforts in arresting inflation; the bank had performed remarkably well to bring the number to within its target of five per cent. The rising imports have also put pressure on the local currency as importers purchase more of the greenback, using the shilling, in order to trade on the international stage.
Uganda's continued dependence on imported fuel also plays a role in keeping the import bill high, especially due to the fluctuations in global crude oil prices.
While presenting the budget for the 2014/15 financial year, the minister of Finance, Maria Kiwanuka, said the country's continued demand for imports had increased the current account deficit, which is likely to further increase towards the end of the year.
Trade deficit
"The current account has remained weak due to a large trade deficit which is projected to widen from $2 billion last year to $ 2.46 billion by the close of the year. This is equivalent of about 14 per cent of GDP. This is mainly due to the continued strong demand for imports, especially investment imports and weaker-than-expected global and regional demand for our exports," she said.
Financial experts expect the Uganda shilling to remain weak for the a significant part of the new financial year as rising demand looms in the face of capital outflows. This, according to the experts, is likely to spell a tough year for traders as the price of imports rises, making goods on the market expensive.
"The shilling is expected to continue on a depreciating trend for the rest of the year. It is expected to trade between 2,590 and 2,710," said Bulinda.
speaking at the opening of the Standard Chartered Bank branch at Acacia mall recently, the governor, Bank of Uganda, Emmanuel Tumusiime-Mutebile, warned that 2014/15 could witness a rise in inflationary pressures of commodities due to depreciation of the shilling against the dollar.
"Since February of this year, the exchange rate has depreciated by about six per cent against the US dollar," he said. "This is not particularly surprising given that the exchange rate had become, by the beginning of 2014, somewhat overvalued."
The last five years have largely witnessed the fluctuation of the Ugandan currency as demand for the greenback grows. However, the Uganda shilling had gained ground in the past 18 months compared to February 2013, the last time the local currency had performed dismally since regaining ground on the 2011/12 slump when it had plunged to 2,885 against the dollar.
At the time, inflationary rates had risen to an all-time high of 30.48 per cent in October of 2011. For now, attention is focused on what strategy Bank of Uganda will employ to shore up the shilling.
If it improves the yields on its treasury bills and bonds, as is expected this week, offshore investors, through some selected banks, could bring more dollars to the market, which could ultimately see the shilling gain some ground. But that means banks might reduce the amount of money they lend to private players.
If Bank of Uganda decides to stay still and wait for other market forces to take root, the shilling could fall further. It's a classic case of damned if it does, and damned if it doesn't.
UAH forum is devoted to matters of interest to Ugandans. Individuals are responsible for whatever they post on this forum.To unsubscribe from this group, send email to: ugandans-at-heart+unsubscribe@googlegroups.com or Abbey Semuwemba at: abbeysemuwemba@gmail.com.
