The Central Bank has said the exchange rate is still stable, with the shilling gaining by 1.6 percent in the three months to December 2022, supported by the prudent monetary policy and the recent declines in the global crude oil prices.
The two developments, which somewhat eased the pressure on the deteriorating terms of trade, increased personal remittances, and foreign direct investment inflows to the oil sector.
However, the Central Bank explains that short-term capital flight from the domestic debt market that was triggered by investor nervousness over the sanctions on Russia and aggressive monetary tightening to curtail surging inflation in advanced economies weakened the shilling during the second and third quarters of 2022, leading to a 3.1 percent year-on-year depreciation in 2022.
Appearing before the Committee on Finance and Economic Development on January 10, the Deputy Governor Bank of Uganda, Dr Michael Atingi-Ego said in six months, the exchange rate movement will depend on global developments, particularly the pace of monetary tightening in the advanced economies.
“The medium-term (one year) outlook is for the shilling to depreciate, reflecting the elevated current account deficit and the tightening of global financial conditions. Overall, the exchange rate movement will depend largely on global developments, particularly the pace of monetary tightening in advanced economies and the overall balance of payments position,” he said.
Dr Atingi-Ego said interest rates stayed on an upward trajectory in the three months to November 2022, reflecting tight financial conditions.Both Treasury yields and lending rates rose.
He stressed that the growth in private sector credit remained below historical averages owing to the tightening of monetary conditions.
He explained that total private sector credit growth averaged about 10.5 percent, year-on year, in the three months to October 2022.
Private sector credit grew by 8.2 percent in the three months to October 2022.