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Shilling weakens on donor aid cuts

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A trader displays Uganda Shilling notes. The Shilling has

A trader displays Uganda Shilling notes. The Shilling has weakened against the dollar which has been attributed to donor aid cuts. PHOTO BY RACHEL MABALA 

By Dorothy Nakaweesi

Posted  Friday, February 28   2014 at  02:00

In Summary

Donor aid makes about 1.2 trillion out of the total budget of 11.1 trillion.

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Kampala- The Shilling is losing stance against the United States dollar after the news of donors suspending aid to Uganda following the signing of the ant-homosexually Act.

By close of business yesterday, the local unit was trading 2,525/2,535, up from 2,450/2,460 last week.

Standard Chartered Bank’s head of financial markets James Mutuku yesterday said: “The shilling is currently trading at 2525/2535 from an opening level of 2,500/2,510. This is a continuation of the deprecation seen on Wednesday when the market opened at 2465 levels and closed at the 2510 levels”.

Central Bank activity
Earlier in the week, the Shilling had slightly strengthened against the dollar in the trading following the Central Bank’s withdrawal of excess liquidity coupled with reduced dollar demand from the corporate sector.

The Central Bank withdrew Shs397 billion through a seven-day repurchase agreement made on Tuesday but this has had a short-live effect.

Responding to the sudden trend for a local unit which had been stronger and stable since the beginning of the year, Bank of Uganda director of research Adam Mugume said:
“Some donors have indicated that they will cancel aid to Uganda. This news has sent shocks, resulting in a spike in the exchange rate depreciation”.
Currently, Uganda gets a total of $500 million (Shs1.2 trillion) both in budget support and grants. Uganda Revenue Authority collects about Shs9 trillion out of the total budget of Shs11.1 trillion.

Mr Mugume says that although the Shilling was overvalued, the current depreciation should not be a distortion.

For country which is largely supported by imports, the current trends will make doing business more costly as business people will spend more money to trade.

Market Outlook
“Our expectation is that once the negative perception and sentiment is factored by the market, the shilling should gain some lost ground. We expect the trading ranges to remain at the 2,510-2,580 ranges for the week,” Mr Mutuku said.

How the shilling has faired

Last week, the Shilling traded with a strong tone and experts had predicted it to keep the stance a trend which was underpinned by inflows from offshore investors buying Ugandan government securities and from non-governmental organisations.
At the week’s close, commercial banks in Kampala quoted the currency at 2,459/2,464, stronger than the previous week’s close of 2,461/2,466, having strengthened to a near two-year high of 2,450/2,455 in the week.
dnakaweesi@ug.nationmedia.com