18 March 2019

Uganda Shilling Slides As Borrowing Goes Up

The Ugandan shilling fell to more than Ush3,700 against the dollar at the beginning of this month, under rising pressure from manufacturers and telecommunications companies engaged in large foreign currency-related transactions.

Energy companies appeared to adopt a lower profile in the forex market.

The shilling fell from Ush3,665 at the end of February, to Ush3,721 at the beginning of March, then recovered slightly to Ush3,713 mid last week, but remained weak during trading hours.

The shilling opened at Ush3,705/Ush3,715 on Wednesday morning, and dropped to Ush3,715/Ush3,725 later in the evening.

Taxes

But mid-month payments for VAT and excise duty, usually made after the 15th day of the month, could generate relief for the local currency as corporates offload dollars on the market in exchange for shillings.

Whereas some manufacturers are reportedly borrowing in dollars to expand their operations and purchase raw materials, telecommunications firms have stocked up heavily on dollars to clear loans taken from foreign parent companies last year.

Significant borrowing in the manufacturing sector suggests improved consumer spending.

Loan repayments in the telecommunications industry reflect borrowing from parent companies to cater for working capital needs instead of seeking expensive bank loans.

However, the impact of seasonal dividend repatriation, which happens between March and April, appears muted -- a consequence of changing transaction habits among subsidiaries of foreign multinationals and unresolved tax matters.

"Some manufacturers are borrowing money in dollars to purchase new equipment and raw materials for their operations. The telecommunications companies are also buying dollars to clear some loans obtained from their parent companies last year," said Simon Peter Kavuma, chief finance officer at Citibank Uganda.

"Bank of Uganda is yet to intervene in the currency market because supply and demand levels are almost matching, and the shilling has become more stable in the past few months.

"Demand for dollars driven by foreign dividend payments appears low because some major clients, like MTN Uganda, bought in substantial amounts of dollars last year. Much of the dollar supply in the market has been stimulated by offshore investors who participate in government debt auctions, especially the two-year Treasury bond," he added.

Forex transactions

Increased forex transactions in the interbank market are also cited for the shilling's latest decline against the dollar, but trading motives remain unknown.

"The banks have dominated the buy-and-sell side on the currency market for the past week, but some people's motives are not clear. Customer activity is also less visible. Making foreign dividend payments has changed over the past 10 years," said Benoni Okwenje, a financial trader at Stanbic Bank Uganda.

"Big corporates now prefer to purchase dollars gradually without causing volatility, unlike in the past when they would storm the market and buy up all the dollars available.

"The central bank is yet to intervene in the forex market because the trading movements seem less erratic, though volatile on a daily basis," he added.

A decline in the shilling means possible higher rates for electricity consumers. In Uganda, periodic changes in power tariffs are determined by movements in inflation rates, international fuel prices and the exchange rate.

Exchange rates account for more than 20 per cent of adjustments in electricity tariffs made at the end of every quarter.

The depreciation could increase power tariffs for the second quarter of the year, which are scheduled for publication in early April.

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