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Collapsing shilling sinks against regional currencies

 

By Patrick Kagenda

Traders say Central Bank lacks capacity to stop it

Following the rapid loss of value of the shilling in the past six months, foreign exchange dealers and traders are questioning the Central Bank’s ability to stop further decline.

Asked to comment on Bank of Uganda’s explanation that the currency depreciation is general and affecting all African currencies and should not be viewed as being unique to the Ugandan shilling, they point at the performance of the Kenya shilling which has been either appreciating or remaining steady over the same period.

The Kenya shilling stayed stable converting at KShs 0.01287 on December 31, 2008 and 0.01282 on May 22; same with the EU ‚¬ at 1.39190 on December 31, 2008 and 1.39565 on May 22. The TShs appreciated only 2% from 1280.3 on December 31 to TShs1313.9 on May 22.

Only the shilling slipped dramatically from Shs 1940 to the dollar on December 31 to Shs 2300 on May 22. That is an 18% drop in value or the equivalent of the price of sugar jumping from Shs 1,000 per kilo to Shs 1,200.

Stephen Mwanje, the chairman of the Uganda Forex Bureaus Association, says the biggest concern is what is Uganda exporting to bring in the dollars.

“The depreciation of the shilling revolves around capacity to diversify our exports and I think the global crunch has had an impact. You can judge by the reduced inflow unlike before. The shilling is not only doing badly against the dollar but also among the regional currencies.

A Forex Bureau analyst told the Business Daily Africa that the phenomenon of the strengthening Kenya shilling against the Uganda shilling at this time of the year could be as a result of traders seeking to cover for their commitments early enough to avoid high costs in the event of tax variations in the national budget.

Earlier, Kenya`s Minister for Trade Amos Kimunya told the same media outlet that “It has become a trend that every year between May and June the Kenya shilling strengthens against the Uganda shilling as the economy receives payments for the first batch of exports.

But Dr. Charles Abuka, the deputy director for research at BoU, insisted in an interview with The independent that the depreciation is a general trend in the region with the exchange rate dropping on all the currencies.

“You have to understand that the exchange rate is market determined and the central bank only intervenes to minimize volatility in the market,” he said.

Responding to trader fears about the shilling, sinking to Shs 2,500 to the dollar by years end, Abuka said “the exchange rate depends on supply and demand depending on trade flow between nations, investment flows and capital flows”. Mwanje disagrees.

“You need to look at the demand side and the supply side,” he said, “But as we speak now we should be speaking about the trend, the rate of loss of value. At every side there is a loss of value. For instance how far is the shilling going to depreciate?”

Mwanje said although a depreciating shilling makes Uganda’s exports cheaper, the worry is the rate at which it loses that value and its impact on proper planning.

“My concern is a bigger one because the shilling is depreciating very fast,” he said, “The rate at which the shilling is depreciating is alarming.”

He added: “For instance if it moved by Shs 50 in 3 years that would be fine. Here we are with a shilling depreciating by as much as Shs 100 in a week or even more in a day. These days we are sometimes forced to change our price board five times a day depending on the level of depreciation.”

Mwanje attributes the collapse of the Ugandan shilling to the regional economies being much stronger than ours.

“In the other international currencies we in Uganda deal in, it’s only the Euro that is gaining strength even against the other currencies,” said Mwanje, “The Euro is over the dollar and catching up with the pound and therefore when you talk about the Uganda shilling, you have to remember that the shilling is pegged against the dollar. So when the dollar loses out against the euro and the shilling loses against the dollar you can see what that means.”

The Forex dealers are also concerned that BoU’s capacity to intervene in the market on the sale side is much reduced.

“It is now at the mercy of the demand and supply forces. I wouldn’t imagine that it would happen the way it is today but I can’t explain why the bank of Uganda capacity is reducing because I am not an authority in that area,” Mwanje said.

 

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