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, said Dickson Magecha, Forex Trader at Standard Chartered Bank in a statement.
Magecha said the trend would further lead to the depreciation of the shilling against the foreign currencies especially the US dollar, hence leading to a rise in the cost of doing business.
Forex experts expect the shilling to weaken further in the coming sessions partly due to the central bank's loose monetary policy stance, the economic impact of aid freezes slapped on the government in response to graft scandals and anticipated dollar demand from the corporate sector. The Central Bank maintained its CBR at 12% for the month of January on Jan. 4.
The shilling weakened further against the dollar on Jan. 5 trading due to continued dollar demand from manufacturers, oil companies and commercial banks. At close of business on Friday, commercial banks quoted the local unit at 2710/20 levels weaker than Wednesday's of 2700/10 levels.
Magecha said 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. 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. 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.