The local currency displayed a dramatic flexing of its feeble muscles last week when it closed the month of October at Shs 2,605/2,614 to the dollar, the strongest since August 1, in what is being seen as an omen that the troublesome inflationary pressures could be starting to ease.
The appreciation of the local currency has largely been attributed to the Central Bank’s inflation targeting policy, which saw the benchmark interest rate shoot to 20 percent in October. The bank introduced the controversial measure two months ago in a bid to mop up excess liquidity to curb inflation, which had caused disquiet by soaring to an 18-year high of 28.3%.
Consequently, commercial banks have been arm-twisted into increasing their lending rates to record levels, which has left their credit queues almost empty.
As a result, the scarcity of the local currency has now forced the demand for the dollar to register a decline, with sluggish consumer spending also forcing banks to convert their dollar reserves so as to bolster their local currency liquidity status.
Fuel prices were the first to make a slight response to the appreciation of the local currency when oil companies reduced their pump prices by at least Shs 200. Other imported commodities as well as food prices are expected to follow suit.
Reports said last week that Uganda’s shilling was expected to extend its rally due to a strong inflow of dollars before a Treasury Bills auction on November 2, as well as low consumer spending induced by tight monetary policy.
The Central Bank was expected to auction an additional Shs 95 billion ($35.6 million) worth of 91, 182, and 364 day Treasury Bills, which was widely expected to generate strong offshore investors and give the local currency another welcome boost.
USE slumbers on
However, the Uganda Securities Exchange (USE) is yet to get a similar respite. The All Share Index (ALSI) stood at just 781 on October 26, the lowest in the year, and the first time it has gone below the 800 mark since July 2009.
Only 25,110 shares were traded on October 28, compared to 1.6 million shares on the same date in 2010. Stanbic Bank did not trade even a single share on the same day, which has never happened since the bank started trading shares on the USE in January 2007.
This was the peak of a difficult period for Stanbic investors, who have seen the share price slump to Shs 140 per share, down from Shs 265 a year ago.
Other local counters are also suffering the same fate, a situation, which according to market analysts, is set to continue into the New Year.
Kenneth Kitariko, the CEO at African Alliance, said offshore investors and the recent pressure on the shilling were responsible for the low activity on the USE.
“We might see a slight change now that the Shilling is starting to gain but though there will be some stability as the year closes, a spike in the ALSI is unlikely in the short term until probably the beginning of the New Year,” he said.
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