Kampala — THE central bank foreign exchange reserves have declined slightly to $2.2b (sh4.8 trillion) from $2.3b.

However, senior bank officials were confident the decline was within comfortable levels to meet the bank's monetary policy objectives.

The bank had $2.2b (sh4.8 trillion) in reserves at the end of February, an equivalent of 5.4 months of import cover.

This compares to $2.3b in January and $2.6b registered in the same period last year, which was equal to six months import cover.

Mary Katarikawe, the Bank of Uganda (BoU) acting director for research, attributed the decline to last year's instability in the foreign exchange market that prompted the central bank to intervene to reduce volatility.

"We had instability, especially in September, October and November. BoU went into the market and used close to $180m in reserves," she said.

"That explains the reduction but we are still holding comfortable levels of reserves. This shouldn't be a cause for alarm."

The local unit dropped from a high of sh1,640 in September last year to cross the sh2,000 mark by the end of 2008.

Instability was occasioned by capital flight by offshore investors, who sold their holdings in Uganda's securities market and bought dollars.

This was due to the global financial crisis that resulted in the drying up of credit.

The local unit has depreciated by 5% in April, but the BoU has not intervened due to stability in the foreign exchange market.

Economists said that a shift from 6.6 months to the current 5.4 months of import cover was not drastic.

"You have to look beyond the narrow trade based indicator of import cover and consider to what extent the reserves are adequate to meet obligations that are not trade related," said the economist.

According to the economist, the gradual decline was coming at a time when the local currency was depreciating and the country's current account balance was widening.