The Observer (Kampala)

Uganda: Shilling Faces Pressure Ahead

Photo: New Vision
The Bank of Uganda headquarters on Kampala Road.

The Uganda shilling was weaker in this week's trading as interbank players closed out position ahead of the year end in a market caught short of dollars.

The unit fell to the week's low on early Friday trading to touch 2,680/90 as compared to a close of 2,645/2,655 one week and a half ago. We expect the shilling to close the year at current levels. The shilling has lost 7.5 per cent against the dollar this year though it had been strengthening since late November, lifted by decreased demand for the hard currency ahead of the year-end festivities.

The annual low of 2,710/2,720 was hit in mid-November as a widening current account deficit, aid cuts and falling yields on government debt piled pressure on the unit. Looking ahead into the New Year, Uganda's sources of foreign exchange are drying up on nearly every front, posing a significant risk to the country's balance of payments position.

The highest-profile incident in recent months was the decision by the European Union and various member states including the UK, Denmark, Sweden, Germany, and Ireland, to suspend aid to Uganda following reports of serious misuse of donor funds. Meanwhile, the decline in yields on government debt (in line with the loosening monetary policy of the Bank of Uganda), will suppress international portfolio investment over the near term, further constraining the country's supply of foreign exchange.

In addition, the most recent data provided by the Uganda Coffee Development Agency on coffee revenues is also discouraging. As of October, the end of the 2011/12 growing season, volumes had declined by 16.9% on a year-on-year basis, while revenues dropped even further, by 23.9%.

Hence we expect the shilling to continue on the current depreciating trend with official support from the Central Bank expected to slow down /smoothen any volatile moves.

Dickson Magecha is a Forex Trader, Financial Markets at Standard Chartered bank

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