26 October 2017

Uganda: Interbank Demand Pushes Shilling Into Depreciation

Kampala — The Uganda Shilling has weakened and breached the key resistance level and traded above 3,660, driven by the surge in demand from importers and interbank activities.

Trading opened the month in the range of 3,620/3,630 by close of business yesterday it had reached 3,660/70 on the Bank of Uganda (BoU) counter.

In interbank money market, overnight funds traded at 7 per cent while one-week funds traded at 8 per cent.

The local unit closing at 3,660/70 levels is the highest in has reached in since the beginning of this year.

Mr Stephen Kaboyo, the lead partner at Alpha Capital - a forex trading firm, talking about the trends in the money market, said the Shilling has been on the back foot largely undermined by the surge in demand from the commercial banks covering their short positions.

"In the last couple of days, the markets have also witnessed significant demand from the energy sector, manufacturing as well importers against subdued supply," Mr Kaboyo said.

He, however, does not rule out fact that the election and political developments in Kenya are partly responsible for the depreciation of the Shilling.

He said: "On the horizon, there is also a strong negative sentiment for the Shilling on account of political developments in the region."

In the same argument Dr Fred Muhumuza, a Makerere University economist attributes the depreciation to some government purchases and adds that if the trend continues for another week, the economy will be greatly impacted.

On the contrary when this newspaper contacted Ms Christine Alupo, the BoU director communications, she said: "The Shilling has been stable the whole of yesterday and saw some slight appreciation."

Asked whether BoU was going to intervene, she said they had no plans do so because the local unit was stable.

Impact

Because Uganda is an importing country with more than 70 per cent goods coming out of the country and the raw materials used in the manufacturing industry largely depending on imports - traders say the depreciating Shilling is upsetting business.

In an interview with Daily Monitor, the chairman Kampala City Traders Association, Mr Everest Kayondo, said: "Right now we are experiencing a slowdown in business because the cost transaction is too high."

He added that life has also not been made better with the taxes which are converted at the current exchange rate-as the shillings depreciates the taxes also go to the roof.

Clarifying on the claims that regional politics especially with the uncertainty in neighbouring Kenya which analysts say is also to blame for the depreciation of the Shilling, Mr Kayondo, said: "The uncertainty in Kenya is not helping the situation. At least 92 per cent of our imports go through the Port of Mombasa. Even at the local scene the politicking of the Age Limit business people are living in fear."

Exports

Much as traders are crying foul, exporters are smiling their way to the bank because the appreciating dollar means more Shillings coming into their pockets when converted.

Reacting to this, Mr Muhumuza agrees with the fact that the exporters should be happy about this trend.

He, however, said: "But the challenge with Uganda's exports is mainly agricultural products and by the time one harvest and exports the dollar would have gone back changed trend."

Regional status

In the regional currency markets, the Kenya shilling was stable despite the political turmoil, largely supported by significant diaspora remittances and horticulture flows.

The Kenya shilling traded between 35/35.5 by the end of business yesterday a stance it has maintained for months. In international currency markets, the dollar lost ground following the release of the Federal Reserve minutes that highlighted concerns about the low inflation environment in the US.

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