Shilling makes major gain as demand for dollar drops
A woman walks past a forex trading board in Kampala yesterday. The Shilling has made major gains against the dollar in recent weeks. PHOTO BY STEPHEN OTAGE
Kampala- The Uganda Shilling continued to strengthen against the dollar this week, defying a trend that most people had predicted. In the last two weeks, the Shilling had been trading in the Shs3,690 range but by the end of trading on Thursday, it was in the Shs3,407/3,417 range against the dollar.
This week alone, the local currency has gained nearly Shs200 on the dollar. Some commercial banks are quoting it at a much lower rate of Shs3,390.
A market note from Bank of Africa (BoA) on Thursday reveals the Shilling strengthened “due to more forex sell-offs.” The sell-off of forex tends to flood the market with previously scarce dollars, which eventually brings down the rate.
In the last one year, the market has been stocking up on dollars, selling them at a premium but now those same dollars have been available.
“Both local and offshore players have been actively trimming down US dollar positions in favour of the local unit since the close of last week,” the note from BOA further reads.
The gains can be traced as far back as mid-October when Bank of Uganda (BoU) raised the Central Bank Rate to 17 per cent.
According to Mr Stephen Kaboyo, the managing director Alpha Capital Partners, the market demand for dollars was triggered by the BoU move to continue tightening.
BoU’s tight monetary policy stance has been geared towards curbing inflation being driven by the strong dollar and food prices. Last month, inflation rose 8.8 per cent from 7.2 per cent on account of rising electricity tariffs and food prices.
The other factor leading to the strengthening of the Uganda Shilling has been the inflows from other sources such as off-shore investors who want to cash in on the higher interest on government debt. Additionally, non-governmental organisation’s funding, which comes in dollars, trickled in at the start of this month.
“All this is happening amidst lower than usual corporate demand. The appreciating trend led to commercial banks unwinding their dollar holdings,” Ms Christine Alupo, the director communications at BoU told Daily Monitor recently.
A stronger Shilling, if sustained, is expected to reduce the costs of production. However, with the massive sale of dollars in the market, speculation has cropped up and BoU may act to bring stability.
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