What you need to know:
Whereas supply has remained steady, Uganda now needs more dollars to purchase fuel imports, which has in turn increased demand for dollars
Money spent on petroleum and related imports doubled during the 2021/22 financial year, according to Bank of Uganda.
Responding to Monitor's inquiries regarding the volatility of the shilling, Dr Adam Mugume, the Bank of Uganda director research, said yesterday that Uganda was now spending more dollars for the same volume of oil related imports, which in effect had impacted movement of the shilling against the dollar.
“First, the price increases of imported goods, including oils, which have no immediate substitute means that Uganda is paying more for the same quantity of imported oils. For instance, the value of fuel imports increased by 52 percent in 2021/22,” he said, noting that this means increased demand for dollars to import petroleum products.
However, Dr Mugume did not indicate how much in real value Uganda spent on oil and petroleum products during the period.
International oil prices have remained volatile since March with a barrel, despite reducing in the past few weeks, now selling for $100.
Dr Fred Muhumuza, an economist and lecturer at Makerere University School of Economics, said yesterday that whereas such an increase is expected to impact imported inflation, it might be necessary given that it will cause change in consumption behaviour and reduce pressure for imports, which in the long run is required to save foreign reserves
Previously, Bank of Uganda has indicated that on average the country imports $86.2m worth of petroleum products, which averages at $958.6m (Shs3.4 trillion) on an annual basis.
However, according to Bank of Uganda the value has since doubled.
Petroleum imports had decreased massively in 2020 but had continued to grow after full reopening of the economy in September last year.
For instance, in May 2020, petroleum related imports dropped to about $33.9m but recovered in November 2020 to grow to $55.6m.
The growth had come after months of sustained growth in volumes and value due to increased economic activity.
Uganda is a net petroleum products importer, with an average shipment of Shs3.2 trillion since 2015.
Uganda mainly imports petrol, diesel, paraffin and Jet fuel.
Dr Patricia K. Litho, the Ministry of Energy head communication & information management, told Monitor yesterday that supply of petroleum products had pretty much remained the same with the last reduction only experienced during a strike by truck drivers at border points at the beginning of the year. According to the Uganda Bureau of Statistics (Ubos) abstract report 2021, a total of 2.068 billion litres of selected petroleum products were sold in 2020 reflecting a 7 percent decrease in 2020 compared to 2.224 billion litres of sales in 2019.
The Ubos data also indicates that during the period, diesel, which accounted for 48.1 percent, was the highest sold product followed by petrol, which accounted for 45.5 percent while jet fuel and paraffin accounted for 4 percent and 2.4 percent, respectively.
Impacting stability of the shilling
The increased spend on petroleum and related products is putting pressure on the demand for dollar which in turn is impacting the stability of the shilling against the dollar, according to Bank of Uganda.
Shilling depreciated by 6% in 12 months to June
The shilling has depreciated by at least 6 percent against the dollar in the 12 months ended June, according to Bank of Uganda.
The depreciation, Dr Adam Mugume, the Bank of Uganda executive director research, yesterday said in response to our inquiries, was mainly driven by massive increase in the value of imported commodities, exit of offshore investors, uncertainty in equity markets and export earnings being heavily outweighed by imports.
Dr Mugume also noted that the Central Bank has been intervening in the market to slow down the rate of depreciation, capping the 2021/22 financial year with a net purchase of $74m.
“Offshore investors in government securities and other financial assets find staying in Uganda less attractive compared to investing in advanced markets. This has resulted in offshore exiting by about $160m between March and July, (which) ultimately [has] added pressure on the shilling,” he said, noting that uncertainty in the market as a result of global developments had also amplified demand for dollars as a relatively safer store of value.
The foreign exchange market has been under pressure since March, experiencing increased volatility in May.
The shilling opened yesterday at Shs3,859.22 against the dollar before closing at Shs3,870.87. Indications are it is likely to breach the Shs3,900 before the week closes.
Dr Mugume also indicated that the shilling continued to be impacted by the low value of exports, which had during the period been heavily outweighed by imports to the tune of about $4.6b in the 2021/22 financial year.
Mr Stephen Kaboyo, the Alpha Capital managing partner, said yesterday that the shilling is expected to remain under pressure going forward, noting the Central Bank had severally intervened in the last few weeks to ease the volatility.
“It is understandable that [Bank of Uganda] will remain cautious and remain on the sidelines, not risking their reserves to defend a depreciation trend that is driven by fundamentals,” he said.
BoU intervenes to ease volatility in the exchange rate on both sides, in which it buys dollars when the shilling is strengthening and intervenes on the sale side when it weakens aggressively.
Dr Mugume noted yesterday that net intervention during the 2021/22 financial year was $74m.