Weak Shilling likely to induce inflation rise, experts predict

Thursday January 8 2015

By Dorothy Nakaweesi

Kampala

Ugandans should brave for higher inflation pressures as the shilling continues to depreciate against the dollar, experts have warned. By close of business yesterday, the shilling was trading in the regions of 2823/2830- the highest it has traded since late 2011 when it traded in the regions of 2900.

Interpreting this trend, Bank of Uganda Director Research Dr Adam Mugume said: “The shilling has depreciated largely because of the strengthening of the dollar against other international reserve currencies. The only danger is that in the short term, the depreciation could induce higher inflationary pressures”.

In the last one year, the local currency has depreciated against the dollar by 12.4 per cent from average of Shs2499 it traded in January 2014 to currently Shs2830. Mr Stephen Kaboyo, the managing director Alpha Capital Partners, a forex trading firm, said the shilling continues to be under intense depreciation pressures primarily on account of an imbalance between demand and supply of forex.

“Currently, demand for forex far outstrips the supply at the time the market is opening fully after the holidays. The key concern at the moment is the inflationary pressures likely to arise because of the weak shilling,” Mr Kaboyo said.

Outlook
The shilling is expected to remain generally weak for most of the first quarter of the calendar year on the back of unfavourable trade balance which is the key determinant of the exchange rate. This year, more volatility is likely to be experienced in the financial market due to uneven recovery in the global economy.

Advertisement

Experts say, the more open an economy is, the higher the effect of the global developments into the domestic economy and Uganda happens to be an overly open economy, hence the impact of global developments on the shilling.

oil price factor
With global crude oil prices are at an average of $50 down from $100 it last traded a year ago, Ugandans should be celebrating but experts say this will not be felt because of the weak Shilling.

Hashi Energy General Manager, Mr Peter Ochieng said: “Because of the weak Shilling, we will not benefit from the global crude oil prices. The weak Shilling makes the cost of doing business high, this means we are using more shillings to buy the dollar.”

Kenyan shilling also weakening against the dollar

According to Business Daily, in neigbouring Kenya, the shilling weakened slightly on Wednesday to lows last seen more than three years ago. Traders said the slide was prompting more demand for dollars from businesses wary of a further dip.

By 0741 GMT, the shilling was trading at 91.00/91.10, down from Tuesday’s close of 90.90/91.00. The last time the shilling traded at these levels was in late 2011. “The significant thing to note here is we have broken the 91 level (to the dollar),” said Nahashon Mungai, a trader at Kenyan Commercial Bank. “The sentiment has already shifted for a weaker shilling.”

dnakaweesi@ug.nationmedia.com

Advertisement