Ugandan Shilling loses ground to the Dollar

shilling

The Shilling is showing weaknesses against the US dollar

 

The Uganda Shilling is showing signs of increasing stress, losing ground to the Dollar by two percentage points. For about a month the Shilling had stood at 3000/10 against the Dollar.

But by the beginning of this week the Shilling had lost almost two percent against the Dollar, closing Monday evening at 3055/65.   James Mutuku, the Head of Financial Markets at Standard Chartered Bank says the market saw some increased end month dollar-demand especially from importers and companies repatriating dividends to offshore investors.

Mutuku says the increased demand coupled with meager dollar inflows pushed the market above 3030 by Tuesday evening. He said they expect the Dollar-Shilling pair to hold at the current levels in the coming weeks with 3030 offering a strong support level and 3080 as the resistance level.

Stephen Kaboyo of Alpha Capital Partners says the depreciation reflects persistent demand for the Dollar from the manufacturing sector, importers and interbank. Kaboyo predicts that the break above the psychological level is likely to open a more significant rally towards 3100 as anxiety builds up.

Fundamentally, says Kaboyo, the weakness is on account of falling revenues from exports amid concerns of a ballooning import bill. He says while Bank of Uganda has tried to manage the Shilling levels in the money market, lower liquidity has not offered solid support but to some extent has helped to slow down the rate of depreciation.

Kaboyo says the depreciating currency raises the prospects of pushing up prices of consumer and capital goods more especially fuel and industry raw materials. This in turn is expected to accelerate inflation which has been steadily rising over the last few months.

Meanwhile, Ugandan Members of Parliament across the political divide have overwhelmingly voted to recapitalize Bank of Uganda to the tune of Shillings 860 billion.

The funds will allow the Central Bank to stabilize the country from economic shocks that come with high inflation and the depreciating Shilling.

The Ugandan State Minister for Finance David Bahati tabled a motion seeking approval from Parliament to allow BOU get about 1.1 trillion Shillings. Section 14 (1) of the BOU Act requires the bank to operate on a capital of 30 billion Shillings.  Clause 2 says that the authorized capital may be increased by a resolution of Parliament to ensure adequacy to the operations of the bank.

Bahati argues that BOU needs more finances to be able to intervene and foil inflationary forces and catalyse foreign exchange movements from time to time.

While most of the legislators supported the motion, some MPs including Terego County MP Kassiano Wadri blamed government for depleting the funds of the bank.

Beatrice Anywar, the Kitgum district Woman MP expressed concern on the timing of the recapitalisation saying with the 2016 polls closing in, the ruling NRM party may manipulate the system to get funds.

Francis Epetait, the Ngora County MP asserted that the bank’s current capital of 20 billion Shillings is insufficient. He said there is need to recapitalize the bank each year.

Geoffrey Ekanya, the Shadow Finance Minister says the BOU Act should be amended to protect the bank from interference. Bahati later agreed to the Opposition’s demand to reduce the money to Shillings 860 Billion.

BOU was last recapitalized in June 2013, to a tune of 410 billion Shillings to boost the issuance of Treasury bills and bonds. This followed an operational loss of 600 billion Shillings in the 2011/2012 financial year.

In March 2015, annual core inflation edged upwards to 3.7 percent from 3.3 percent in February 2015. This was partly driven by the effects of the depreciating Shilling on the prices of imported goods.