January 15, 2015

Uganda Shilling Tumbles Further, Surpasses Ugx2900

If Bank of Uganda (BOU) thought they had slowed the depreciation of the Uganda Shilling by warning speculators, the latter has not heeded.

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On Wednesday the Uganda Shilling breached the Ugx2900 barrier for the first time since October 2011. At some forex bureaus, the Shilling is as high as Ugx2940 – higher than levels even seen in 2011.  In 2011, the Uganda Shilling was at a high of 2901.

The outlook on the depreciation is rather grim.

“It is really a case of market reaction to weak fundamentals which is implies more weakness for the shilling,” Stephen Kaboyo of Alpha Capital Partners said in an email.

The weakening of the Shilling is likely to continue, even reaching Ugx3,000 by March according to some analysts.

BOU last week warned that it would reign in on speculators. The bank blames speculators for compounding the depreciation.

It went into the market and made dollars available but this only cushioned the Shilling for hours, slowing the depreciation.

But on Friday last week, as the market closed, BOU bought an unspecified amount of Dollars. By start of the week, the Shilling continued to depreciate.

The Dollar has been strengthening globally against all major currencies. The strong Dollar has been attributed to lower oil prices.

Uganda has not been spared by the stronger Dollar. However there are other factors at play on the domestic scene. Currency traders at Stanbic Bank, Barcalys and Centenary concede that there is “overwhelming demand” from the manufacturing and energy sectors in order to import.

Being an import led economy; demand for Dollars is outstripping the available supply.

Already, some companies are adjusting prices to cater for the depreciation. Pay TV subscription for DSTV have been increased by almost 4% as a result of the weakening Shilling.

Additionally, electricity tariffs are set to rise in the next three months, as the Electricity Regulatory Authority (ERA) reviews rates.

In the quarterly review of power tariffs, the depreciating Uganda Shilling has been considered the largest contributor to the increment.

Fuel companies have also been hesitant to reduce pump prices as they remain uncertain about the direction of the Uganda Shilling. This even after global oil prices have more than halved since August 2014.

“Our income is in Uganda Shillings however our purchases are in US Dollars therefore when the Uganda Shilling depreciates this has an impact on the prices,” says Hans Paulsen the Managing Director Vivo Energy, the Shell Licensee in Uganda.

Bloomberg’s tracker so far shows the Uganda Shilling as the worst performing currency in Africa.

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