Uganda shilling weakens by less than one percent 

Bundles of twenty thousand shilling notes in a bank. The central bank maintains that the Uganda shilling remains relatively stable against the US dollar.  PHOTO/ Michael Kakumirizi

What you need to know:

Depreciation pressures emerged in the last quarter of 2023 as a result of the World Bank’s financing freeze in Uganda as a result of the Anti-Homosexuality Act of 2023.

Although the Uganda Shilling has been volatile, the Bank of Uganda says it depreciated by 0.9 percent in 2023 compared to 2022 when the depreciation was slightly higher. 

In 2022, the effective rate depreciated year-on year by 1.6 percent which indicated that the Uganda shilling weakened against the weighted basket of currencies of the country’s trading partners.

The central bank maintains that the Uganda shilling remains relatively stable against the US dollar despite the recent spells of depreciation pressures in the quarter to November 2023.

In response to Daily Monitor questions on the performance of Uganda shilling in 2023, the executive director research Bank of Uganda, Dr Adam Mugume said that the Uganda Shilling was stable in the first eight to nine months of the year, in the range of Shs3,694-3,746 per dollar.

“However, noticeable depreciation pressures emerged in the last quarter of 2023. This was a result of several factors: first, the World Bank announcement of freezing any new project financing in Uganda as a result of the Anti-Homosexuality Act of 2023. This combined with negative rating of Uganda by several rating agencies resulted in negative sentiments which have triggered defensive purchasing of dollars, in absence of strong forward or hedging forex markets,” he said.

“Compared to the Kenya shilling which depreciated by 17.5 percent; South African Rand depreciated by 12.6 percent; Tanzania shilling depreciated by 3 percent; Rwandese currency routinely more managed witnessed a depreciation of 11.7 percent. However, the Euro and British pound strengthened against the dollar, with respective appreciations of 2.8 percent and 0.7 percent,” he added.

Explaining other factors that contributed to the depreciation of the shilling in the later part of 2023, Dr Mugume said the decline in international reserves, in part, due to servicing of external debts and inability to purchase forex from the market, meant that BoU couldn’t intervene on the sale side when sharp depreciation pressures emerged due to reasons that weren’t economic fundamentals. 

“This could have been interpreted by the market participants that BoU is either leaning towards a depreciation or is unable to intervene to tame volatility in the exchange rate due to decline in reserves,” he said. 

Dr Mugume further stated that the economy is slowly gaining traction from Covid-19 effects. As such, demand for forex, for example, to replace the machinery that had been disregarded due to uncertainty and low demand.

“Most emerging and frontier economies saw their currencies weaken due to global factors. For example, the emerging negative aspects of debt defaults, which could be hurting countries like Uganda.  We have continued seeing offshore investors exiting the Ugandan financial market, in part because of attractive yields in safe havens but also because of the elevated fear of debt default,” he said. 

Speaking about the economy, Dr Mugume said the economic growth is projected to strengthen in 2024 and inflation is also projected to remain benign (moderate and steady increase in prices of goods and services over time). This is a solid foundation for FDI inflows projected at about $2.9 billion. This combined with rising export receipts, workers remittances and recovering tourism receipts and fiscal consolidation help the shilling to remain stable.