Why shilling depreciated against US dollar in FY2022/23

This photo taken on September 8, 2023 shows US dollars. PHOTO/AFP

The Uganda shilling depreciated by 5.1 per cent against the US dollar to an annual average exchange rate of Shs3,752.47 per US dollar in Financial Year (FY) 2022/23, from Shs3571.78 recorded in FY2021/22, the Bank of Uganda has announced.

According to the central bank’s annual FY2022/23 report released on Monday, “depreciation pressures were carried over from the last quarter of FY 2022/23 as most advanced economies adopted hawkish monetary policies to curtail global inflationary pressures.”

Deputy Bank of Uganda governor Dr Michael Atingi-Ego highlighted that the depreciation is primarily due to global factors like heightened uncertainty kindled by the Russia-Ukraine war, supply chain disruptions that spiked commodity prices.

“The depreciation pressures further persisted due to spillover effects of the Russia-Ukraine war such as supply chain disruptions, high international commodity prices and deteriorating terms of trade in addition to tight global financial conditions which triggered portfolio investors’ exit from the domestic debt market,” the bank said.

Still in the report, the central bank said the Uganda shilling depreciated year-on-year, by 8.4 per cent in both August 2022 and September 2022, registering the highest monthly average rates in FY2022/23 of Shs3832.38 and Shs3825.59, respectively.

“This pace of depreciation was significantly checked by the contractionary monetary policy stance, and tight liquidity conditions in the money markets due to the tightening of the cash reserve requirement," the central bank added.

The central bank noted that the Shilling was further supported by an increase in export revenues from various commodity exports which outpaced import expenditure, more favorable terms of trade and lower debt service payments.

"The nominal effective exchange rate depreciated year-on-year by 1.6 per cent indicating that the Uganda Shilling weakened against the weighted basket of currencies of the country’s trading partners and or key global economies," Bank of Uganda observed.  

In the period under the review, the central bank points out that despite the depreciation trend of the shilling, Bank of Uganda purchased on a net basis from the Interbank Foreign exchange Market (IFEM) at $186.05 million, of which the total purchases for reserve build-up amounted to $216.05 million while sales for market intervention amounted to $30 million.