Bernard Busuulwa
2 November 2008
Nairobi — The global financial crisis has hit the Uganda shilling as offshore investors liquidate their portfolios in government securities to benefit from lower stock prices in world markets.
The shilling lost 13.4 points against the US dollar last month, falling from an average market rate of Ush1,680 to over Ush2,000 in less than a month as offshore investors rushed to liquidate their investments here before diverting them to alternative holdings in Western financial markets.
The shilling's decline comes after months of persistent strength against the US dollar, peaking at a high of Ush1,600 in September.
The Bank of Uganda has attributed the dramatic fall in the currency to revived confidence among offshore investors in the health of Western financial markets following approval of financial bailout packages for banks in the United States and Europe in recent weeks.
Notable among them is the United States' $700 billion plan. Offshore investors constitute 20 per cent of the investor base in the Uganda government securities market, controlling funds in excess of Ush500 billion ($285.7 million).
Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda, said the exchange rate is an immediate but temporary impact of the financial crisis, among other impacts that are likely to hurt the economy.
"Its impact will be felt in many ways in the long term -- in terms of reduced exports, tourism earnings, overseas development aid and reduced remittances. Reduced remittances resulting from the continued effect of the credit crunch and recession in the Western world will hit the economy hardest," Mr Tumusiime-Mutebile said.
Last week, BoU was injecting some $300,000 a day into the foreign exchange market to stabilise the shilling, but with little impact, partly because foreign currency supply in the form of remittances was declining as well.
The central bank could not quote how much remittances have fallen by, although it is known that the target for 2007 was $856 million and was to hit $1.3 billion at the end of 2008, just before Western markets started tumbling.
Stephen Mwanje, a currency dealer in Kampala, said declining remittances have fuelled the appreciation of the dollar against the shilling.
He added that appreciation of the dollar against the pound Sterling has significantly lowered the value of remittances from Britain, where the majority of Ugandan emigrants work.
Now the central bank is predicting that economic growth will drop from 8 to 5 per cent in the second half of this financial year as a result of knock-on effects of the global financial crisis.
Financial analysts told The EastAfrican that capital flight and lower remittances, will defiantly slow economic growth.
The analysts further cautioned that the manufacturing and services sector could suffer more than the agricultural sector as consumers begin spending more on food compared with manufactured goods and services.
The coffee sector, one of Uganda's major export earners with revenues in excess of $200 million, is likely to suffer less.
Andrew Rugasira of Good African Coffee said, "Though the credit crunch will affect consumption in our existing markets, our sales are likely to remain stable in the next two quarters because of the coffee sector's ability to withstand the effects of recession through its established niche markets.
Farmers will also benefit from a stronger dollar because it will yield more when converted into Uganda shillings.
Regardless of movements in the exchange rate, the central bank believes the country's banking sector will not suffer the kind of losses Western banks are suffering, because there is less exposure to global financial markets.
BoU affirms that all banks in Uganda remain well capitalised with an average core capital ratio of 19 per cent, average return on assets of 3.47 per cent and a return on equity of 25.65 per cent by the end of June 2008. The ratio of liquid assets to deposits is estimated at 48.22 per cent, higher than the required 20 per cent.
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