In the Quarterly Review of Uganda’s Financial Markets, Catherine Kijjagulwe, Head of Trading at Absa Bank Uganda, provided insights into the performance of the country’s currency during the third quarter of 2023.
How Did the Shilling Start the Third Quarter?
In July 2023, the Ugandan shilling began trading at levels of 3665/3675.
Shilling’s Performance Throughout Q3 and Key Drivers
Throughout the third quarter, the shilling experienced a decline, reaching lows of 3765/3775. This depreciation was primarily influenced by increased dollar purchases by offshore counterparts, clients, and interbank entities. The World Bank’s decision not to provide new funding to Uganda due to concerns about the Anti Homosexuality Act legislation also contributed to this trend. Strong demand on the dollar side outpaced flows from NGOs and remittances. Additionally, businesses increased their merchandise stocks in anticipation of higher consumer demand in the year’s final months.
Shilling’s Closing Performance at the End of Q3
The shilling concluded the third quarter on a weaker note, with rates at 3755/3765, reflecting a depreciation of approximately 2.45% from the quarter’s opening levels of 3665/3675.
Impact on People and Businesses
A weaker shilling means that those purchasing dollars need more shillings to acquire the same amount of dollars, leading to increased costs for consumers due to higher input costs. Globally, rising crude oil prices, currently exceeding $90 per barrel, have also resulted in slightly higher fuel costs, impacting transportation expenses. Conversely, dollar sellers benefit from the weakened shilling.
Projections for the Final Quarter
Currency volatility is expected to persist during the last months of the year. While remittances and diaspora flows may increase, continued corporate demand is likely to keep the shilling trading within the 3600-3800 range.
Regulatory and Monetary Policy Developments in Q3
In August 2023, the Monetary Policy Committee lowered the Central Bank Rate (CBR) by 0.50% to 9.50% from 10.00% to stimulate economic activity by reducing credit costs. They also reduced the Cash Reserve Requirement to 9.50% from 10%. The reduction in CBR rates has slightly reduced short-term Money Market yields, but this effect has not yet fully impacted lending rates due to a typical lag effect. Overall, government securities continue to offer relatively high yields.
