Since late 2020, the Uganda shilling has registered improved performance despite the Covid-19 pandemic that affected foreign exchange inflows, especially the tourism receipts.
Bank of Uganda says on average, the shilling depreciated by 0.38 per cent in 2020 compared to an appreciation of 0.6 per cent in 2019.
“The relative stability is partly a reflection of subdued aggregate demand. The shilling depreciated by 3 per cent between February and May 2020 but appreciated by 3.3 per cent between May and December 2020,” Bank of Uganda said recently.
Last week, the Shilling was in a narrow range of Shs3,540/50 mainly on interbank and corporate market activity.
With gradual economic recovery gaining momentum in Uganda following recovery from the effects of the 2020 Covid-19 induced lockdown, there have been hopes that the Uganda currency is likely to remain stable in 2021.
“…the outlook for a post-pandemic rebound in global growth and trade in 2021 and the reduced odds of unpredictable trade wars should lead to a reduction in exchange rate volatility,” the executive director of research Bank of Uganda, Dr Adam Mugume, said recently.
However, with Uganda currently under the second Covid-19 induced lockdown, it remains to be seen if the Shilling will remain stable.
Stephen Kaboyo, the managing director of Alpha Capital Partners, says the effects of the lockdown on reduction in production, restriction on non-essential business operations and reduced household demand of goods and services are beginning to manifest on the shilling.
“The currency was a touch weaker after attempting to break beneath a key level of technical support around 3,500 over the past couple of weeks,” Mr Kaboyo says.
“Forecast suggests, the fresh lockdown could trigger further mild currency sell-off. However, on the general market outlook, as the end of the financial year gets closer, scant appetite for forex is expected as most corporate players will be focusing on the end of year tax payments,” he adds.
Currency depreciation, for example, can be expected to affect the demand for money, aggregate demand, and the levels of prices and output, as well as to induce external and internal relative price shifts that alter the composition of the expenditure.
The Uganda shilling has in recent been the strongest currency in the region, with movements in the East African Community (EAC) partner state currencies relative to the US dollar being mixed in the quarter to February 2021.
“On average, the Tanzania Shilling was stable, slightly depreciating by 0.03 percent quarter-on-quarter to an average rate of TZS 2,298.5 per US dollar, while the Kenya Shilling and Rwanda Franc depreciated 0.4 percent and 1.1 percent respectively to an average of KES 109.7 and RWF 976.3 per US dollar,” the BOU Monetary Performance Report for April 2021 says.
A low cost of the US Dollar helps boost production especially when the producer is importing raw materials and other inputs, which become cheaper when purchased using the dollar.
This according to Uganda Manufacturers Association Executive Director, Daniel Birungi, leads to the low cost of production and should lead to lower consumer prices.
However, Uganda’s foreign exchange rate usually fluctuates in short periods (volatility), especially since it is largely affected by external factors like the global commodity process, a rise or fall in donor inflows, among others.