Tuesday January 2 2018

Shilling might not maintain stability in New Year - experts

Local currency. A woman displays Uganda

Local currency. A woman displays Uganda Shilling notes and United States dollar notes in Kampala. The Shilling depreciated on average by 5.6 per cent unlike the previous year when it depreciated against the dollar by 27 per cent. PHOTO BY RACHEL MABALA 


Kampala. The Uganda Shilling overall exhibited a stable posture through the year ending 2017, making it predictable for the private sector to do business. But experts say it may not uphold this position in the New Year.
The local unit opened in January 2017 trading at 3,580, but gradually depreciated and hit the lowest level of 3,665 in October 2017. The currency crossed a couple of key levels and kept within a wide spread.
Because of this, the local unit only depreciated on average by 5.6 per cent unlike the previous year when it depreciated against the dollar by 27 per cent.

According to Bank of Uganda (BoU), this performance was broadly stable.
Speaking to Daily Monitor, the BoU director research Dr Adam Mugume, said: “The Shilling was broadly stable, depreciating on average by 5.6 per cent over the year; comparing the December 2017 exchange rate to December 2016, the Shilling depreciated by 0.22 per cent.”

He said the Shilling’s performance was largely attributed to a stable macroeconomic environment that saw core inflation averaging 4.6 per cent and headline inflation averaging 5.9 per cent.
“We saw the fiscal policy being prudent and balance of payment improving as reflected by the annual growth rate of exports which grew by 18.7 per cent while imports grew by 6.6 per cent,” he added.
Mr Mugume said the improvement in balance of payments resulted in BoU purchasing about $570m (Shs2 trillion) for international reserve build up from the forex market.

Impact on economy
Differing from BoU’s Mugume with respect to the economic activity, some experts say the shilling was patchy.
Mr Stephen Kaboyo, a partner at Alpha Capital – one of the leading forex firms in Uganda, in his recap on the performance of the Shilling, said: “There was a general slowdown in almost all sectors of the economy.”
He added that a number of economic factors inhibited economic expansion for much of the year and these were; weak consumer demand, weak currency, inflationary pressures driven by high food prices on account of adverse weather conditions, weak exports coupled by elevated geopolitical risks.
“In addition, exogenous headwinds such as the strengthening of US dollar impacted on Uganda’s economic condition in particular the volatility of the Uganda shilling,” he added.

Mr Kaboyo added that the major concern for most of the year was the subdued growth which informed the loosening of monetary policy by Central Bank to stimulate economic activity.
Despite the consistent reduction of the policy rate, lending rates remained high, credit was constrained and many businesses struggled.

Economic sentiment
As the year closed, the general economic sentiment had improved somewhat, characterised by low food prices as a result of good weather conditions in the second half of the year and a modest recovery in private sector credit, underpinned by an accommodative monetary policy stance.
“Gathering from the above, there is reason to remain optimistic and focus on the medium term prospects that indicate growth is likely to bounce back- primarily driven by anticipated investments in oil and gas in 2018 and improvements in other key sectors of the economy,” he concluded.

Ideally, a stable Shilling means that everyone (importers and exporters) are winners according to Kampala City Traders Association chairman Everest Kayondo.
“Last year was good and favourable for traders doing business unlike the previous year (2016) when many businesses closed shop,” Mr Kayondo shared.
However, Mr Kayondo expressed concern about the commercial interest rates which remained high despite BoU reducing the Central Bank Rate (CBR) to the lows of 9.5 per cent down from the highs of 17 per cent it was the previous years.
Not until towards the close of the year, some commercial banks such as Stanbic Bank moved out of box and slightly reduced its prime lending rates (PLR) to 17.5 per cent from 18 percent thus making it the lowest among the commercial banks.

Experts predict that in 2018, the Uganda Shilling is likely to remain vulnerable in the short term on account of domestic macro-economic imbalances.
“As the global strength of the dollar continues to put frontier market currencies at the risk of weakening,” Mr Kaboyo said.
He thinks in the New Year there will be a transmission of US high interest rates to the domestic fixed income markets as the US market becomes attractive for international investors.
He said: “A weaker Shilling by implication raises the cost of living considering the fact that Uganda is a net importer. However, a weaker Shilling plays in favour of exports by boosting export revenues.”

Cost of debt
This scenario is also likely to affect the cost of servicing the country’s external debt, making it more expensive in the short run.
Similarly, BoU’s Mugume thinks that the strengthening of domestic and foreign economic growth rates could also result in weakening of the shilling.

“As stronger domestic economic growth would mean higher imports demand and strengthening of global economy could mean capital outflow to advanced economies,” Mr Mugume added.
Dr Fred Muhumuza, an economist and Makerere University lecturer, in his response, said as investors continue shying away due to low demand and inability of government to pull off major projections, the Shilling will remain weak in the New Year.

“I know many investors are hanging on oil projects but I don’t see them materialising soon due to the pending discussions, designs and political uncertainty for the investors. With no serious investors, we shall continue importing which will also put some pressure on the Shilling.
However, he adds that the low demand in the economy and lack of success in big government projects will moderate imports and help the shilling to depreciate less.