Shilling: A currency in free-fall
The shilling has weakened about 7 per cent against the dollar since the beginning of the year. PHOTO BY RACHEL MABALA
What you need to know:
- Mr Peter Ochieng, the Hashi Energy, managing director, told Daily Monitor prices of petroleum products have been influenced by the volatility in the dollar market, which has strengthened against major currencies.
- The low export sector performance, Prof Nuwagaba said, has been put under pressure by growth in imports, which forcing a sustained a growth imbalance in the current account.
Kampala. The shilling has in the last two months been under intense pressure, losing massively against the dollar.
Available data indicates the local unit has shed about 7 per cent of its value and about Shs228 in real value against the dollar, mainly on account of sustained demand against falling dollar inflows.
According to Prof Augustus Nuwagaba, a development economist, the volatility could be explained by four fundamentals including low exports performance, debt effect, huge infrastructural projects and price volatility in the fuel sector.
The low export sector performance, Prof Nuwagaba said, has been put under pressure by growth in imports, which forcing a sustained a growth imbalance in the current account.
“We have very few export receipts against a lot of import invoices which means we are paying more dollars than we earn,” he said.
According to data from the Central Bank, Uganda currently has a trade deficit of $2.54b (Shs9.8 trillion), which has improved from $3.5b (Shs13.6 trillion) last year.
The shilling continued sustained losing streak closing yesterday at Shs3,878. The unit had at the close of Friday weakened, breaching its new resistance Shs3,900 level.
Breaching resistance levels
In June alone the shilling has breached two new resistance levels of Shs3,800 and Shs3,900 respectively, which forced the Central Bank to intervene twice in a single month.
More than Shs300b in dollar value has been injected only in June, according to sources familiar with the matter. Last Friday, the Central Bank is said to have intervened with about Shs150b after the local unit breached the Shs3,900 resistance level.
The unit momentarily gained to close the week at 3,831 before losing again on Monday to sell at Shs3,861.
The shilling has been the worst hit in the region compared to the Tanzania shilling and the Rwanda franc, which have lost by 3.7 and 1.8 per cent since the beginning of the year.
The Kenya shilling has beaten odds to strengthen by about 0.89 per cent against the dollar in the last two months.
Dr Adam Mugume, the Bank of Uganda director research, told Daily Monitor the rapid depreciation has forced the Central Bank to intervene in the currency market “twice this month to calm the market and reduce exchange rate volatility.”
This was contrary to the non-intervention stance that the Central Bank had earlier taken, saying the causes of the volatility were market driven.
Bank of Uganda had said then that the unit had been weakened by increasing demand from the energy sector, importers and the effect of speculators.
However, the interventions have done little to calm the exchange rate market that continues to show signs of volatility.
Mr Stephen Kaboyo, a forex expert and managing partner at Alpha Capital, told Daily Monitor the forces exerting pressure on the shilling were stronger thus requiring a relatively stronger intervention to impact the markets.
“The fundamentals are very strong and therefore the intervention is likely to wear off fast,” he said, highlighting the quick rate at which the shilling surrendered gains immediately after the intervention last Friday.
The current position could be a valuable gain for exporters, according to Kaboyo, but a downside to the already weak economy.
“Being a net importer, sustained weakness of the shilling will bring about import induced inflation, as imports become more expensive and prices edge up,” he said.
Away from inducing inflation, Kaboyo said, the current prospects of the exchange rate have the potential to discourage investments, especially portfolio investors who will be less willing to hold government debt.
Apart from this, the volatility spells trouble for businesses holding dollar debts but use the shilling as their primary currency.
The growing dollar-dominated government debt could also be a factor to explain the current volatility of the shilling.
Uganda currently has a debt of $11.2b (Shs43 trillion) much of which, according to Prof Nuwagaba, is dollar-denominated.
Out of the $11.2b (Shs43 trillion), $3.8b is domestic debt, which could be an indicator that government is paying a lot of money to foreign companies in dollar terms.
Impact of fuel prices
High prices: The effect of increasing petroleum imports, much of which are procured in dollar, have also affected the stability of the shilling.
This has been exacerbated by sustained high prices on the local market which have far reaching implications on the economy.
Currently, a litre of petrol costs Shs4,100 up from Shs3,600 while diesel costs Shs3,780 up from Shs3,400.
Mr Peter Ochieng, the Hashi Energy, managing director, told Daily Monitor prices of petroleum products have been influenced by the volatility in the dollar market, which has strengthened against major currencies.
“All oil transactions are done in dollars. The stronger the dollar the higher the pump prices,” he said.
However, in February petroleum dealers had claimed that the movement of fuel prices [northwards] was temporary pending complication of repair works on the Nairobi Pipeline Terminal.
But four months later, even after the completion of the repairs, fuel prices continue to be high with no signs of reducing.
