With a few days to the 2014/15 Budget reading, the Shilling has continued its depreciation against the dollar, a situation that is worrying experts.
By close of last week, the Shilling had slid to its lowest in the last six months, trading in the ranges of 2565/2570 against the greenback.
Bank of Uganda director Research Adam Mugume attributes the weak Shilling performance to both domestic and external factors.
“On the domestic side, Uganda’s foreign exchange inflows from both exports and other transfers have weakened yet demand for forex to cover imports is strengthening, thus the depreciation result,” Dr Mugume said.
He added that some of the strengthening during the previous months was a result of offshore inflows, a factor he attributes to yields on government securities which were attractive in comparison to foreign interest rates.
“For example, yields on one year treasury bills are now at around 11 per cent down from 13 per cent, in part because of reduced government borrowing from domestic market,” Dr Mugume further explains. He said this has meant that offshore demand for domestic securities has weakened hence putting some pressure on exchange rates.
On the external factors, Dr Mugume says the US dollar is generally strengthening against other international currencies. “As United States reduces its liquidity injection into the market while other countries like European Union and Japan are still on the monetary policy easing stance. Consequently, this spills over into domestic market,” he said.
According to an analysis from a currency exchange website, Exchange Rate.Org.uk, Uganda Shilling’s summary history against the dollar from December 16, 2013 to June 5, 2014 shows that this is the second time the local unit has gone down, the first having happened on March 24.
The website shows that the strongest the Shilling has ever been in this period was on February 18 when it traded at 2452/2462 and the average performance has been 2513/2523.