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Why Uganda Shillings Will Weaken Further

The Uganda Shilling continues its downward trend against the US dollar more than two months since its appreciation journey against the dollar was halted.

It has since depreciated by more than 200 shillings.

The official foreign exchange rate by the Bank of Uganda put the dollar at 3,750.91 buying, while it was selling at 3,760.91 by close of business Monday.

At commercial banks, the shilling opened Monday’s session at the 3725/3735 trading levels.

“Continued demand through the day led to a further sharp weakening of the unit to close the session at the 3780/3790 levels, money markets were liquid on Monday with overnight yields at averages of 6.610%,” said Catherine Kijjagulwe, Head of Trading at Absa Bank Uganda.

The Bank of Uganda mopped 95 billion shillings through an overnight repurchase agreement (Pepo). A Repo is a form of short-term borrowing for dealers in government securities.

In the case of a repo, an agency sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.

Repos are a common tool of central bank open market operations like removing excess currency from circulation.

The Bank of Uganda says the firming trend of the shilling was in March disrupted by sentiments over the conflicts in eastern Europe.

“The Uganda Shilling, like many other currencies, experienced significant depreciation pressures in early March 2022 over bearish sentiments on the Ukraine-Russia war and related sanctions on Russia,” says a statement by BOU.

Consequently, the unit lost 2.1% percent against the US Dollar, temporary halting its appreciation trend observed over the last two years or so.

The Uganda shilling is usually strengthened by improving balance of payments or when exports are doing better than exports, stronger financial inflows from Foreign Direct Investments, as well as loans to government.

Other factors are Treasury Bonds and Bills which attract foreign inflows because of the high yields Uganda offers, personal remittances from workers abroad, tourist spending as well as financial inflows from abroad to NGOs in Uganda, according to the BOU.

In the last four months, prices for commodities like crude oil, wheat and vegetable oil among others have skyrocketed globally, leading to a higher demand for dollars to import them.

Fuel prices are expected to remain high or continue rising for some time until global prices and other factors ease, unfortunately, the producing countries are not yet willing to raise production levels.

“Indeed, crude oil prices reached a 9-year high driven by a supply-demand mismatch and are expected to stay above 100 dollars per barrel until the end of 2022 as the Organisation of the Petroleum Exporting Countries (OPEC+) remains unwilling to increase production,” says a statement by BOU.

Similarly, food prices are expected to increase by an additional 30 percent above their current all-time high, as both Russia and Ukraine are important commodity producers.

“Increased uncertainty in the financial markets and tightening of monetary conditions in Advanced Economies could also lead to portfolio reversal and or stop in Uganda, thereby weakening the shilling.”

BOU fears that further disruptions to global supply chains resulting from sanctions instituted to end the Russia-Ukraine conflict and zero tolerance to the pandemic in China could further push up prices.

However, moderated domestic demand due to higher energy and commodity prices as well as a good crop harvest could reduce inflation in Uganda.

-URN

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