The COVID-19 pandemic has caused uncertainty, leaving investors fleeing Uganda for safer havens.
“The COVID-19 pandemic has also caused a lot of panic and uncertainty in global financial markets, with some markets experiencing unprecedented dramatic declines, resulting in a significant loss of wealth. In times of such turbulence and uncertainty, flight for safe havens may be unavoidable,” Bank of Uganda’s Monetary Policy Report for April 2020 says.
It adds: “Indeed, there are indications that offshore institutional investors have already started exiting the domestic securities market. For instance offshore holdings of Government securities declined by Shs59 billion between February 2020 and 6th March 2020, while their holding of total deposits in domestic banking system declined by Shs105.7 billion during the same period,” the report reads in part.
The report adds that Uganda’s overall external position will therefore likely to deteriorate, putting upward pressures on the exchange rate and economic activity.
“The precise degree to which the external position will worsen will depend on the persistence and severity of the pandemic. However, the assumption here is that the pandemic will be temporary and will fade out by the close of FY 2020/21. Its effects will nonetheless persist, at least in the short-term,” the report says.
It adds: “In FY 2020/21, we assume that activity will gradually recover in H2, but remain muted in H1.
It adds that all foreign exchange earnings are expected to remain drastically muted in FY 2020/21 relative to both the earlier projection for FY 2020/21 and the revised projection for FY 2019/20 after incorporating the effects of the COVID-19 pandemic.
“The current account may deteriorate further, leading to a weaker shilling given the restraint financial account inflows. Foreign exchange reserves are projected to decline from 4.2 future months of imports to about
3.5 months of import cover by end of FY 2019/20,” it reads.
To support stability of the exchange rate and to ensure that international reserve buffers remain strong, the report says, Government of Uganda may require BoP support amounting to about US$500 million.
“In the same vein, the current account balance in FY 2020/21 could worsen by about US$ 1.6 billion to US$4.1 billion. International reserves on the other hand would decline to 3.6 months of future imports of goods and services in FY2020/21 from the 4.6 projection that did not consider the COVID-19 pandemic. Consequently, the BoP support needed to support stability of the exchange rate and to ensure that international reserve buffers remain strong would amount to US$800 million,” the report says.