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Shilling takes heavy punching from dollar

By Patrick Kagenda

In the middle of last year, the Ugandan Shilling appreciated against the dollar. The importers were all smiles as they required fewer shillings to buy dollars thereby making their businesses flow smoothly. On the punching end were the exporters who would earn less from their exports as the dollar was headed for a nose dive. The situation took a different turn towards the end of the year when the dollar began punching holes in the shilling. Today the story is different as the shilling has continued in a free fall with no foreseeable immediate intervention.

At the African Alliance stock brokerage firm, the General Manager for investment banking Kenneth Kitariko told The Independent: “The shilling’s weakness in the recent past can largely be explained by the slowdown in foreign portfolio inflows into the government debt market due to the sharp fall in interest rates. Treasury Bills and Treasury Bonds are no longer as attractive to foreigners as they have been in the past.”

He added: “During this period there is outward remittance to pay dividends from foreign owned companies.” Kitariko said that while the Central Bank has adequate reserves to intervene, it wants to stimulate the economy after the brutal global recession by having interest rates down. So intervention either by selling dollars or raising interest rates will defeat this policy. For now it’s a good policy until the economy responds through credit growth,” he said.

On the effect of inflation going up as a result of the expensive dollar, Kitariko says: “Inflation from imports will be muted by a reduction in food prices unless the shilling continues weakening.”
The same view is shared by the investment manager at Stanbic Bank Patrick Mutimba. “The shilling strengthening that was envisaged in mid 2009 was artificial. It was based on portfolio investors who wanted to return to the Government Bond Market. The government of Uganda bonds were upgraded by the rating agencies, leading to more interest by some offshore players,” he said. He said the rates of return have since reduced from 12% in June 2009 to 5% (currently) for the 12- month treasury bills. The three-year bond has fallen from 14% in June 2009 to 8% currently.

“With the reduction of interest rates on the government of Uganda bonds, many investors have lost interest, hence they do not need to buy Uganda Shillings and sell dollars. But also the dollar is strengthening relative to many other currencies globally,” Mutimba said.
The Central Bank has always maintained that they do not target any particular exchange rate. They have stated that their concern is to minimise shocks by smoothing out rapid changes.
“Volatility is one of the market hazards that come with a liberalised economy. If you intervene in this exchange rate, where do you put a stop? Bringing order to the shilling is likely to be a first step. Other important issues that will need government’s intervention will also come up. There are many issues like pump prices of fuel and the utility tariffs which will also require a strong government intervention,” he says.

“The challenge is for Ugandan business men to familiarise themselves with these issues and find solutions from their bankers and service providers,” he adds.
A currency that has a lower inflation rate is expected to be more stable compared to other currencies that are experiencing high inflation. However, in Uganda’s case the shilling was declining due to high inflation yet it was strengthening against the more stable currencies like the dollar, Euro, Pound, Yen and others with low rate of inflation. The appreciation of the shilling that occurred mid last year could be attributed to strong inflows for investment in the Government Bond Market, the Uganda Securities Exchange, direct investments like oil exploration, real estate, commercial banking, telecom sector, remittances from Ugandans living abroad as well as the donor inflows. “The new depreciation of the shilling can be termed as a return to the market fundamentals,” said Mutimba.

 

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