Kampala — OFFSHORE investor interest and inflows from international agencies have boosted the shilling against the dollar to trade below the 2,000- mark for the first time this year.

The shilling touched the 1,990/1995 level per dollar in the inter-bank market on Friday, prompting the central bank to intervene to smoothen the spike in rates. This compares to 2,060/2,070 it traded last Wednesday. Some forex bureaux were quoting the unit at 1,980/1,990 per dollar.

"The appreciation is purely driven by offshore sellers. There is a lot of dollar supply against a backdrop of low corporate demand," said Raymond Mutibwa, the head of rates and credit trading at Standard Chartered Bank.

Dealers predict the local unit will remain strong during the week as corporate demand remains sluggish against strong dollar inflows.

"The central bank intervened, but the rates came off as soon as they left the market. Going forward, we should expect a strong shilling," said Mutibwa.

Offshore investors that had previously exited government securities market due to the global economic recession have made a come-back.

"In light of another Treasury bill auction coming up in the week, we anticipate a stronger shilling," said a dealer.

The central bank has invited bids for a sh70b Treasury bond auction scheduled for September 9. This is an increase from the previous auction two weeks ago where it offered sh40b.

Uganda lost close to $300m (about sh642b) when offshore investors exited financial markets en masse last year.

The local unit dropped from a high of sh1,640 to the dollar last September to sh1,960 by the end of last year.

Analysts say the stimulus packages offered by the West were beginning to bring liquidity back into the global market, which has encouraged offshore investors to return to Uganda's financial market.

The central bank late last month announced it planned "frequent" interventions, mainly with repos from September to help stabilise short-term money market rates.

Short-term rates in Uganda usually run on a two-week cycle, rising one week and falling the next, and rates creep up during a crunch following the end of the fiscal year and another mini-tightening in December.

"The purpose is to create more stability in the short term money markets rates," Stephen Kaboyo, the central bank's director of financial markets, said then.

"The repo instrument will be the principle instrument."

"(It's a) proactive approach.

"Liquidity will be more stable.

"This will lead to stability in short-term rates," he said, adding that the frequency would be on a daily basis.

The new policy took effect on September 1 and will be based on projections of government operations, reserves, the reserve money path and interbank interest rates, the bank said.

"There's definitely going to be more action in government securities ...rates will definitely crash," a fixed-income dealer said.

Yields for 364-day government paper fell to 12.936% last month from 13.409% at the last auction.

End of year taxes in June and slow government expenditure at the start of the July-June year traditionally create a liquidity shortfall.

Rates also rise in December due to Christmas spending and mid-year taxes, traders say. The Bank of Uganda said that it hoped the policy would iron out the liquidity issues facing Uganda's markets.

It said pricing of repos would remain unchanged. Kaboyo said scheduled auctions of government securities would be unaffected by the policy. He disclosed that the central bank was mulling a 10-year domestic bond.