What you need to know:
According to Bank of Uganda, the stock of foreign exchange decreased to $4.23b in June down from $4.26b, which is 4.3 months worth of import cover from 4.4 months
Foreign reserves have dropped by $37m, according to Bank of Uganda.
The current reserves are worth 4.3 months of import cover down from 4.4 in February.
During the period ended May, according to Bank of Uganda, the stock of reserves stood at $4.23b down from $4.26b in February.
Uganda imports more than it exports, which puts pressure on foreign currency reserves due to persistent growth in foreign exchange outflows.
The drop has also been worsened by the volatility in the global economy, which has caused an increase in prices of key import commodities such as fuel.
However, this has been mitigated by an increase in export earnings, which for the first time in many months, increased by 11.6 percent quarter-on-quarter, growing to $111m.
Export revenues, the Central Bank said, were boosted by rising global agricultural commodity prices and an increase in export volumes.
During the period, imports grew by 3.1 percent due to a surge in global prices-more than compensated for lower import volumes. Oil and non-oil imports volumes contracted by 14.1 percent and 7.3 percent, amid a price increase of 30.6 percent and 12.1 percent, respectively.
The Central Bank also indicated that current account deficit had narrowed by 22.9 percent to $768m, reflecting improved trade deficit, increased secondary income surplus and narrowing of primary and services deficits in the quarter to May.
The balance of payment is expected to improve in tandem with the likely shrinkage of trade deficit as higher inflation impacts on consumption and investment demand while the financial account surplus is expected to narrow on account of tightening monetary and financing conditions.
However, on the other hand, the central bank said strong foreign direct investment and increased project support inflows are expected to support the financial account.
Overall, balance of payment deficits are projected throughout most of the medium term due to high cost of debt service, averaging $1.4b and narrowing the financial account surplus amid a widening current account deficit.
The Central Bank also noted that the shillings has continued to depreciate against the dollar at a rate that is faster than other East African EAC currencies.
Between May and June, the shilling depreciated by 3.1 percent compared to 2.6 percent in May.
In June, the Central Bank noted, $ 37.25m was sold compared to $ 222.75m in May as volatility in the foreign exchange market subsided.
However, an increase in the cash reserve ratio on June 23, offered some support to the shilling.
Projection on shilling
According to Bank of Uganda, the shilling is expected to continue depreciating mainly due to global developments and weak balance of payment position.
During the quarter to June, Uganda’s trade deficit contracted by 7 percent, reflecting slowing economic activity in the country.