Brexit: Uganda Shilling weakens against the dollar

Kampala.

Britain’s exit (Brexit) from the European Union has sent shock waves to the global financial system with the US dollar gaining substantially while leaving the Euro and Pound sterling devalued.

This has spilled over into the domestic market, with the Uganda Shilling depreciating from the average of Shs3,350 to a dollar to more than Shs3,400 in just two days. The Shilling last traded in the 3,400 ranges in February and appreciated into the 3,300 regions toward end of February where it has stabilised until last Monday.

Experts say the impact of the Brexit on the global economy, though still difficult to quantify in the short run, will be seen more through the volatility in the financial markets.

Dr Adam Mugume, Bank of Uganda’s director research, said: “It is still early to gauge the impact of Brexit on the global economy and Uganda in particular, but it is obvious there is an impact on the global financial conditions.”
Mr Stephen Kaboyo, a lead partner at Alpha Capital, a forex trading firm, reacts to Brexit in the same way. He said: “Outlook points to a weak Shilling in the coming days on account of interbank demand as offshores are likely to reduce their exposure to frontier markets following the news of the results of Britain’s vote to leave the European union.”

Impact
Mr Mugume thinks in the medium to long-term, the impact will depend on how the new Britain will relate with Europe and whether Brexit will trigger herding behaviour with other countries also exiting, leading to the collapse of the Euro.
“Given that UK is a major source of foreign direct investment (FDI) and workers remittance into Uganda; Brexit could result in weakening of the UK economy, this will certainly impact Uganda,” Mugume observed.

UK’s exit from EU may worsen the country’s investment attraction which is already tumbling.
The FDI has for nearly four decades become an important avenue for economic growth and development in developing countries given the potential role they play in accelerating growth and economic transformation. Developing countries, including Uganda, are strongly interested in attracting FDIs.
Mr Mugume earlier informed this newspaper that in 2015, FDI to Uganda was estimated to have dropped to $1 billion (about Shs3.4 trillion) due to weakness in the global economy in the year.

Bilateral trade
UK remains the largest cumulative investor in Uganda in road vehicles, power generating machinery, medicinal and pharmaceutical products and general industrial machinery with bilateral trade in goods between UK and Uganda exceeding £100 million (Shs460 billion) in 2014 alone.
More than 100 UK companies are operating in Uganda. These include well-known companies such as Tullow Oil, Standard Chartered Bank, Barclays Bank, Unilever and Shell, among others.

Remittances
UK is one of the leading sources of Uganda’s remittances to relatives of Ugandans living and working in the diaspora. According to the World Bank, last year Uganda posted the highest growth in remittances with 21 per cent, receiving over $1.1 billion (Shs3.6 trillion).

The Uganda Shilling has started to depreciate as a result of UK leaving EU. Although UK uses the Pound, most transactions are in US dollar. The dollar has gained value in UK forcing currencies of economies that trade with UK to depreciate.

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