4 March 2014

Uganda: Battered Shilling in Quick Recovery

The Uganda shilling came under tremendous upward pressure, rising above 2,530 from the strong trading level of 2,460 in a single trading session, propelled by the passing of the anti-gay legislation.

In assessing the market conditions, the knee-jerk reaction was sentiment-driven as the markets took a view that this could hurt the confidence of the international community.

Traditionally, grants and concessional loans are an important source of government financing. Following the 2012 OPM financial scandal, donors re-aligned their aid strategy and began providing direct project grants and loans and the reduced budget support grants.

In the budget of 2013/14, the government deliberately provided for the bulk of the budget to be funded using domestic revenues by over 80 per cent. Budget support has, therefore, been on a declining trend since the global crisis of 2008 where it accounted for about 30 per cent.

Taking a look at other supply sources of forex, according to BOU Balance of Payment figures, remittances from the diaspora were almost 2.5 times the total budget support and project inflows in 2012. This is likely to increase as the developed economies rebound.

On the other hand, in the financial year 2013/14 concessional loans were budgeted at Shs 1,234bn. There could be some challenges if these loans are suspended. Again, government had projected that these would decline in the medium term as the country explores opportunities for commercial borrowing.

On another optimistic view, government will be banking on oil revenues a few years down the road to finance its programmes. On the likely direction of the Uganda shilling going forward, the depreciation pressure will die down once the market shrugs off the negative sentiment.

On the downside, we could witness portfolio outflows in the fixed income market in the near term and this could keep the shilling bearish. In the event that the Uganda shilling's depreciation threatens to push inflation upwards, the likely response from BOU would be to tighten the policy stance.

Stephen Kaboyo is the managing director at Alpha Capital.

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