Shilling weakens despite dollar inflows

The demand for dollars is outstripping supply, which has seen the shilling experience a volatile stance against the greenback.
The volatility continues despite several interventions by Bank of Uganda since April 2017, which has in a way helped to prop up economic recovery.

On Monday, Bank of Uganda maintained the Central Bank Rate at 9 per cent, a move that seeks to uplift private sector credit as well maintaining a firm grip on the targeted 5 per cent inflation over the medium term.
In an interview on Monday Mr Stephen Kaboyo, the Alpha Capital managing director of told Daily Monitor the money market was experiencing an upsurge in dollar demand.
“While there has been some inflows mainly from exports of coffee, they have not been strong enough to deal with the demand,” he said, explaining the current vulnerability around the shilling against the dollar.
The demand, he said, had been occasioned by a number of factors such as dividend payments, among others, adding that this in itself has exerted pressure on the shilling.

Mr Kaboyo also said that the decision for BoU to maintain the CBR rate at 9 per cent was to check inflationary pressures, which continues to be a threat.
Mr Fabian Kasi, the chairman of Uganda Bankers Association and Centenary Bank managing director, told Daily Monitor that the shilling was under pressure as a result of increased demand for the dollar.
“The reason as to why the shilling is losing ground against the dollar is that all the inflows may not be matching with the demand,” he said.

The shilling has for about a month now been under intense pressure losing by about Shs100. The unit last week touched the Shs3,700 mark, one of the weakest in more than three years.

This, experts say, has partly been occasioned by the increasing import bill that has grown to about $672m
Dr Fred Muhumuza, a development economist and a lecture at Makaerere University, said while exports have increased, expenses on imports continues to exert pressure on the money markets.
“While inflows (dollar) are coming in, there is high out flows on imports and dividends pay out,” he said, adding that the increase in FDI notwithstanding has seen the shilling continue to be under pressure.

According to Dr Adam Mugume, the BoU executive director for research, there has been an improvement in inflows in the last 12 months ranging from February 2017 to February 2018.
Data from BoU indicates that FDI has increased by 28 per cent from at $742m to $500m between February 2017 and February 2018.

Remittances grew to $1.2b down from $1.1b in the period under review while exports have grown by 17 per cent, increasing from $2.5b to $3.4b in the same period.
While the different increases provide a solid foundation for the shilling, the local unit continues to be under pressure.

While presenting the monetary policy statement for April 2018, Mr Emmanuel Tumusiime Mutebile, the BoU governor, said growth outlook was more positive than forecasted with signs of increased confidence.
“Growth is projected at an average of 6.5 per cent in the next three years,” he said, adding that this was premised on the strong private and public investments that have improved agricultural productivity.

However, Mr Mutebile said, the volatility in the exchange rate, food crop and international oil prices could have negative implication on the growth projections.
The growth in Uganda’s exports, according to the Ministry of Finance, has been attributed to growth gold and beans exports with coffee experiences minimal declines in the period under review.

DIVIDEND PAY OUT
Experts say that the need for companies to pay out dividends could have put pressure on dollar inflows.