Uganda: Shilling Weakens Ahead of Election - BoU

14 January 2021

The gain in the US Dollar globally has seen the Uganda shilling depreciating by 0.3 per cent in the last three days.

Besides the strengthening of the US Dollar globally, market participants in the currency market and the Bank of Uganda say there was also increased demand for the US Dollar by investors.

In Uganda, foreign exchange rates are updated three times a day with different rates being quoted which can either be high, reflecting appreciation or low reflecting depreciation of the shilling against other major trading currencies in the market.

Shilling crosses Shs3,700 mark

By yesterday mid-afternoon, the official exchange rate by the Bank of Uganda was placing Uganda shilling trading against the US Dollar at Shs3,708.87 buying and Shs3,718.87 selling unlike on January 12 when the opening exchange rate was at Shs3,070.13 buying and selling at Shs3,718.13 per US Dollar.

The Executive Director of Research Bank of Uganda, Dr Adam Mugume told Daily Monitor yesterday that the shilling's weakness has, in part, been due to strengthening of the US Dollar.

"The Euro has depreciated against the USD by 1.2 per cent in the last three days while the Uganda shilling has depreciated against the USD by 0.3 per cent in the same period," he said.

Dr Mugume said that the strengthening of the US Dollar coupled with domestic demand for the dollar after the festive season largely explains the trend in the exchange rate.

Impact of rescheduling Treasury Bond

Whether the rescheduling of the Treasury bond by slightly prolonging the maturity period could have had an impact on the foreign exchange market in Uganda by moving out of the market by the offshore investors.

Dr Mugume said: "There is instead an increase in offshore investment in the domestic market rather than exit."

Uganda's foreign exchange rate market is driven by forces of demand and supply which have a direct impact on the exchange rate levels of the day months or year.

The manager of Unimon Exchange Services Limited, Mr Steven Sande, told Daily Monitor that the exchange rate movement in Uganda on January 12 was due to high demand for the US Dollar on that day.

"There was increased demand for the US Dollar yesterday (January 12 2021) compared today," he said.

Mr Sande said the market on January 13 has been stable with the Uganda Shilling buying at Shs3,680 and selling at Shs3730.

A Daily Monitor mini survey yesterday at some forex bureaus in the country revealed that the Uganda Shilling was trading in the range of Shs3,680 to Shs3,698 buying the US Dollar in the forex bureaus and selling was in the range of Shs3,715 to Shs3,740 by midday.

The director of Pay Uganda Money Transfer Exchange Services, Mr Faisal Bukenya, said there has been stock in the financial market with some investors staying longer without demanding for the US dollars.

"There was unwinding in the market with some offshores selling their Shilling to buy the US Dollar. There was a takeout of profit by some companies/investors, which saw the shilling weakening a bit," he said.

As of January 8, the US Federal Reserve said the US Dollar Broad Index was at 111.6291, advanced foreign economies was at 102.5248 and emerging market economies index was at 122.4576.

Pre-election economy

Shilling under pressure

Pre-election noise has exerted some pressure on the Uganda Shilling.

Elections in Uganda kick off today January 14. An election year is often a time of uncertainty for societies that practice a democratic or parliamentary form of government. Key issues affect economic stability, the judicial system in case of disputes, private sector activities slow down as the investors wait to see the outcome of the elections and prospects in the economy, while foreign investors do take out part of their investment/capital.

Uganda's economic expansion in 2021 is expected to continue below the potential 6-7 per cent, as the economy is projected to grow at low pace of 3.1 per cent with increasing import bills requiring the Bank of Uganda to have adequate foreign reserves.

Lending is expected to remain high due to risks associated with credit default. Increase in public debt is also weighing down the economy as there is constant outflow of money in debt serving.

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