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Uganda shilling continues to depreciate against the dollar

The Uganda shilling has continued to depreciate against the US dollar as both local and external factors exert pressure on the local and other emerging currency markets.

For more than a week, the shilling has just stayed short of touching the 3,900 level against the dollar, amidst sustained intervention into the market by the Bank of Uganda by selling dollars or buying out excess liquidity. On Monday, the shilling opened at Shs 3,865, having declined from Shs 3,715 at the beginning of July, one of the fastest rates of depreciation in recent years, according to various monitoring tools and traders.

The head of trading at Absa bank Uganda, Catherine Kijjagulwe said: “The shilling remained on the back foot during the week as month-end inflows from NGOs and other sectors were outmatched by the healthy demand from corporates, offshores and the interbank keeping the unit weak at levels of 3860/3870. The unit is likely to continue buoying within the 3800-3900 trading range unless healthy flows come through to cover the continued demand.”

The persistent decline of the shilling was attributed to increased demand by offshore investors coupled with intensified demand by oil importers, according to Stephen Kaboyo, managing director at Alpha Capital Partners.

The rate of depreciation of the dollar has mainly been influenced by the skyrocketing costs of imports like fuel, cooking oil and steel, as well as transport and other services, which have had a spillover effect on the prices of other consumer imports. In effect, one has to look for more shillings to buy the scarce dollar today than a month ago.

According to experts, the appreciation of the dollar against many currencies started in early 2020 when investors withdrew from foreign investments over the uncertainty of the future. Pritosh Ranjan, investment director at Schroders Wealth Management wrote that in 2021, as economies opened, internationally traded commodities like petroleum products became more expensive, further boosting the dollar, before the outbreak of the Russia-Ukraine war earlier this year.

As the US fights the highest inflation rate in decades, the expected rise in the interest rates is also forcing holders of the dollar to retain it until the outlook of the market is more certain.

“Emerging countries that rely on commodities like Brazil and South Africa have seen their currencies perform better than for example the East African currencies,” Ranjan said on his company’s website.   

Uganda’s main sources of foreign exchange are donor funds to the government and civil society, tourism and migrant workers’ remittances, coffee and gold exports. While coffee exports have maintained an upward trend, having risen from $560 million in 2020/2021 to $862 million in 2021/22, the others have remained below the pre-Covid-19 levels.

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