Bank of Uganda (BoU) acknowledges its limited capacity to address the depreciation of the Ugandan Shilling against the dollar due to dwindling foreign exchange reserves and heavy debt burden.
The Ugandan Shilling recently traded at 4,000 to a dollar for the first time at a bank, marking a continued depreciation trend for the local currency. Despite the official rate by BoU being 3,865 buying and 3,875 selling, volatility and sustained dollar buying pressure have weakened the Shilling throughout the week.
Catherine Kijjagulwe, Head of Trading at Absa Bank, noted that demand for dollars persisted, particularly from offshore players investing in the Kenyan market, specifically targeting the Infrastructure Bond. She anticipates continued volatility in the near term.
BoU Deputy Governor Michael Atingi-Ego attributes the Shilling’s strength in the previous quarter to seasonal factors such as diaspora inflows and reduced import activities in December. However, economic activity picking up has led to increased demand for dollars, impacting the FX market.
Despite this, BoU’s intervention capacity has been constrained by declining foreign exchange reserves over the past two years. High debt repayment obligations, reduced offshore investor inflows, and withdrawal of foreign exchange have hindered BoU from selling dollars to stabilize the rate since June 2022.
Globally, the strengthening of the dollar has exacerbated the situation, affecting currencies of emerging and frontier markets. BoU emphasizes that the foreign exchange rate will continue to be determined by market forces of demand and supply.
Local factors, including raw material imports by the manufacturing sector and investments in oil, gas, and energy projects, contribute to the increased demand for the dollar. Additionally, the strengthening of the Kenyan Shilling, driven by dollar inflows due to anticipated eurobond repayment, further impacts the Ugandan Shilling’s performance.
