Central Bank concerned as Uganda Shilling continues to decline against US dollar

The value of the Uganda Shilling against the dollar has continued to weaken amid continued deterioration of terms of trade occasioned by the global economic crisis.

According to the Bank of Uganda performance report for June 2022, the Shilling made a monthly unit loss of 2.6 percent against the US dollar in May 2022.

The shilling has continued to exhibit volatility in May and June. The official foreign exchange rate by the Bank of Uganda put the dollar at 3,750.91 buying, while it was selling at 3,760.91. At commercial banks, the shilling was often at the 3725/3735 trading levels.

“The foreign exchange market came under pressure in the three months from March 2022 and the pressure intensified in May 2022. The volatility of the shilling-dollar exchange rate deepened on a depreciation path in May 2022 and was the highest in the EAC region,” the BoU report reads in part.

The report blames this in part to the tightening of monetary policy by the Fed and other advanced economies’ central banks, leading to offshore investors adjusting their portfolio holdings in Uganda.

“In addition, the deteriorating terms of trade that has caused the demand for dollars to increase amongst the energy companies and other importers has also added to the pressure,” the report adds.

 To stem the volatility, Bank of Uganda says it intervened by selling US dollars and stayed reserve accumulation purchases.

Nevertheless, in the April 2022, the shilling remained strong in real effective terms, appreciating by 1.2 percent year on-year reflecting both declining foreign inflation relative to domestic inflation and continued strengthening of shilling against the US dollar.

In the near-term, BoU warns that the shilling may continue to weaken as the US dollar strengthens globally.

“This view is underpinned by the Fed’s more hawkish monetary policy stance and the impact of the deteriorating terms of trade on the current account of the balance of payments,” the report reads.

The executive director of research Bank of Uganda, Dr Adam Mugume says the decline of the Shilling is due to the rising inflation.

“Money is a bad store of value. It is a good medium of exchange. Money’s loss of value largely reflects the effect of inflation. If inflation averaged 2.2 percent in 2021, ideally money lost value by the same magnitude,” he says.

“Therefore, one ought to minimise holding cash. Instead, you should hold money in an account that earns an interest rate that is higher than inflation. Almost 50 percent of deposits in banks are demand deposits that earn almost zero interest rate,” he said.

The executive director Uganda Manufacturer s Association (UMA), Mr Daniel Birungi, says the problem is largely macro- in nature and is determined by a number of factors; case in point is our dependency of imports, the constantly varying interest rates and risk aversion among investors among others.