19 August 2011

East Africa: EA Currencies Battered

Photo: Nation
The woes afflicting Kenya's currency have been building up over the past six months.

The recent turbulence among the global financial markets resulting mainly from the problems in the Euro zone has seen a number of African currencies fall freely against the dollar.

Despite exchange rate volatility being a global problem, East African currencies have been hit hardest with the Ugandan and Kenyan Shillings taking a real tumble.

The local currency for instance, has depreciated by 21 per cent since January this year while the Kenyan Shilling has fallen by 16 per cent over the same period.

The Tanzanian Shilling on the other hand has fallen by 10.8 per cent while the Rwanda Francs has depreciated by 2.1 per cent.

By 11:30 am yesterday, the dollar sold at Shs2,772/80 while the Kenya unit went for Ksh92/3. The Tanzanian Shilling exchanged at Tsh1,622 and the Rwanda Francs went for RWF600.28.

The free fall in real value of local units manifests itself in the loss of purchasing power of currencies as measured by rising inflation. Commodity prices in the region have been skyrocketing.

Uganda's inflation for instance stands at 17.8 per cent according to the July figures from the Uganda Bureau of Statistics, the highest in the region compared to Kenya's 15 per cent, Tanzania's 13 per cent and Rwanda's 7.14 per cent.

The weakening local unit, according to Dr Lawrence Bategeka, a senior research fellow at the Economic Policy Research Centre, is a result of low dollar supplies precipitated by low exports, reduction in foreign direct investments and remittances from Ugandans living abroad due to global economic hardships.

He also cited profit repatriation by multinationals as a contributor to low dollar supplies in the market.

Mr Alfred Brian Agaba, a market analyst, says that countries need to expand their export base so as to bring in more foreign exchange.

However, the depreciation of the local unit means that while imports become very expensive, exports also become cheaper there by fetching fewer foreign exchanges. Mr Bategeka, however, said the Central Bank should tighten the monetary policy so as to mop up excess liquidity out of circulation and sell more dollars to stabilise the exchange rate.

Bank of Uganda raised the Central Bank Rate from 13 per cent in July to 14 in August in a move to tighten the monetary policy aimed at preventing the current food inflation from feeding into higher inflation for non-food items.

However, Dr Louis Kasekende, the deputy governor, Bank of Uganda, was recently quoted in the media as saying that it is sometimes necessary and desirable for exchange rates to depreciate in order to allow economies to adjust to external shocks.

The Rwandan Franc is the second strongest currency in the region after the Kenyan Shilling.

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