Rising import bill to further weaken shilling, says Citibank
The shilling has since the beginning of the year weakened by about 6 percent against the dollar. Photo | Ffle
What you need to know:
Citibank says that an increase in expenditure on fuel imports will weaken the shilling due to growing demand for dollars to meet import needs
Citibank has said increased expenditure on imports and a surge in interest rates is expected to impact Uganda’s balance of trade.
Speaking in an interview last week, Mr Mark Smith, the Citibank head of treasury and trade solutions for Europe, Middle East and Africa managing director, said that an increase in expenditure on fuel imports will weaken the shilling due to growing demand for dollars to meet import needs.
Therefore, he said, in the next 12 to 24 months the balance of payment for net commodity importers, including Uganda, will be volatile, because of an increase in fuel, energy and food prices.
“So, we expect Uganda and other African countries to experience volatilities in the balance of payments,” he said, noting that this will be compounded by the recent and expected rise in the US Federal government interest rates, which have so far increased by 0.75 percent.
The Federal Reserve, he said, is again expected to raise the rate by 0.75 percentage points as it seeks to control US’s inflation, which has risen to 9.1 percent, the highest rate in more than 40 years.
This increase impacts both exchange rates - as offshore investors in government treasury instruments exit countries such as Uganda - and subsequent effect thereafter on the balance of trade for developing countries.
In June, Bank of Uganda said the current account deficit had widened by 8.6 percent in the 12 months to April, largely reflecting the bulge in the trade deficit.
The services deficit, however, moderated and rendered some support to the current account due to the rebound in tourism exports receipts and a decline in payments for other business services.
The Central Bank noted that the widening of the trade deficit reflected deteriorating terms of trade, worsened by 17.7 percent on average during the 12 months to April due to a surge in prices of imports, which had largely surpassed that of exports. Bank of Uganda further indicated that the value of goods imported had contracted by 3.5 percent as the price effects were marginally dominated by a 12.1 percent and 31 percent contraction in the volume of oil and non-oil imports, respectively resulting from a slowdown in domestic demand.
“The current account deficit is expected to deteriorate, driven by the surge in oil prices and non-oil commodity prices, which is expected to result into a wider trade deficit,” Bank of Uganda noted in June.
