BOU Worried As Shilling Depreciates Marginally

finBank of Uganda has intervened at least three times this week to shore up the Shilling as it depreciated against the US dollar.

The Uganda Shilling started the week stronger continuing the good rally since mid-2013, however, by end of this week, it had depreciated by 3.2percent. By close of trading on Friday afternoon, the shilling had depreciated to 2539.86 Uganda Shillings from 2460 Uganda Shillings against the United States Dollar at the beginning of the week. BOU intervened in the market by selling dollars, since their demand was on a high, thus making Ugandan exports more expensive. This reduced on the volatility in the market.

When the money markets opened for trading on Friday, the shilling had depreciated by 3.7percent. This was due to the announcement by the World Bank that it had put on hold a 98 United States Dollars (223 billion Uganda Shillings) loan to Uganda’s health sector. When BOU intervened for third time in a week at about midday Friday, the depreciation decreased by 3 percent. Christine Alupo, the Director Communications at BOU, confirmed to URN that they had indeed intervened “three times this week” and sold dollars in order to “stem volatility.”

She did not reveal the value of the dollars that were used to intervene in the market.

Stephen Kaboyo, Managing Director, Alpha Capital Partners, said the sharp depreciation of the Uganda Shilling against the Dollar was due to sentiments in the money markets.  Kaboyo said that the markets took a view that the move by the World Bank could hurt the confidence of international community.

The signing of the anti-gay act by President Museveni on Monday has led to a foray of donor countries and lending agencies to review and divert their aid to Uganda. The United States, which gives Uganda close 400 million Dollars in Aid, said it was reviewing Aid to Uganda. Sweden is also currently reviewing all aid to Uganda, whereas, Denmark, Netherlands and Norway are rechanneling their budget support to Non-Government Organisations.

Kaboyo says that after the 2012 scandals in the Office of the Prime Minister and the Ministry of Public Service, donor countries have been changing their approach from budget support to issuing concessional loans and grants. As a result, the government opted to finance 80 percent of its budget using domestic resources.

Concessional loans in the current 2013/14 budget are at 1.2 billion US Dollars and Kaboyo notes that there could be some challenges for the government if the loans are suspended. The 98 million Dollars that has been delayed was to help in the renovation of ten hospitals in Uganda, among other things. If suspended, that would mean government would have to divert funds from some sectors to renovate the hospitals.

Kabayo is however optimistic, “the depreciation pressure will die down once the market shrugs off the negative sentiment” and that “government will be banking on oil revenues in a couple of years down the road to finance its programs.”

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