The Ugandan shilling crossed the year on the back-foot as interbank players closed out position ahead of the year end, in a market caught short of dollars, leaving the local currency down 7.7% against the greenback in 2012.
At the yearly close, commercial banks quoted the shilling at 2,685/2,695 from Friday's close of 2,680/2,690. Subsequent to that, the unit has continued to steadily depreciate in the new year and is closing the week 1% lower at 2,710/20. The Bank of Uganda was in the market selling unspecified dollars on Wednesday in a bid to stem the pace of the depreciation and reduce volatility in the forex markets.
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 donors to suspend aid to Uganda following reports of serious misuse of donor funds. As a result, the government says its planned 2012/2013 public spending will fall short by $260 million.
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. 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.