Government expenditure on the Karuma and Isimba Power Dams has led to a decline in the foreign reserves held by Bank of Uganda (BOU).
The decline, in excess of US$300m to US$3.1bn was revealed by Dr Louis Kasekende, the Deputy Governor, BOU when he was releasing the Monetary Policy Statement for October and November 2014 on Tuesday.
BOU uses foreign reserves to intervene in the money market to stem volatility. Reserves also work as a buffer against economic shocks.
Dr Kasekende revealed that this decline had been anticipated.
Uganda awarded the US$2.2bn 600MW Karuma Hydro Power Project to Chinese Firm, Sinohydro Corporation in 2013.
The Uganda government is to meet 15percent of the cost of the dam and had reserved about Ushs1trillion (US$350m) from the energy fund. It is this money that was drawn down in September 2014, for the project to commence.
This money was held in dollars to secure it from foreign exchange losses. In-fact Dr Kasekende also notes that the draw-down had been expected in the last financial year, but this didn’t happen.
This is the first time that foreign reserves have declined by such a big margin. At the current level, Uganda still has import cover of reserves for over 4months, which is still above the International Monetary Fund (IMF) recommendation.
Dr Kasekende emphasized that central bank will now start rebuilding the reserves to at least five months of import cover.
Increased reserves for a country mean that it has capacity to withstand external shocks for a specific period of time. In rebuilding the reserves, BOU intervenes in the domestic market and buys United States Dollars.