QUARTER 3: Currency likely to remain volatile in last few months of 2023

Kampala, Uganda | THE INDEPENDENT |  Quarterly Review of the Performance of Uganda’s Financial Markets, with Catherine Kijjagulwe, Head of Trading at Absa Bank Uganda.

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QUESTION:  How did the shilling open the third quarter of the year?

The shilling opened the month of July 2023 at the 3665/3675 levels.

QN: What were the trends in the shilling’s performance throughout the third quarter of the year and which factors drove these trends?

The shilling weakened during the quarter to touch lows of 3765/3775, mainly driven by panic dollar purchases by offshore counterparties, clients and interbank due to a statement issued by the World Bank that they would not be providing new funding to Uganda due to the Anti Homosexuality Act legislation that they claimed was punitive. Flows from NGOs and remittances were outcompeted by the strong activity on the demand side. The quarter also continued to see a healthy demand pipeline as businesses stocked up on merchandise for projected consumer demand in the last months of the year.

QN: How is the shilling fairing as we end Q3?

The shilling closed the third quarter on a weak footing at the 3755/3765 levels in comparison to the quarter’s opening level of 3665/3675 about a 2.45% depreciation.

QN: How will this affect people and businesses?
A weak shilling implies that dollar buyers require more shillings to purchase their required amount of dollars and this impact is then transferred to the end consumers of goods – making goods more costly since the cost of inputs would also be relatively high. Globally, we have also seen a continued rise in crude oil prices that are currently above $90 a barrel and this has also translated into slightly higher fuel costs, which also impacts transport costs. Dollar sellers on the other hand are getting more shillings for their dollar sales and getting a benefit from the weak shilling.

QN:How do you project the shilling will perform in the final quarter of the year?

The currency is still likely to remain volatile during the last few months of the year. Remittance and diaspora flows should start to trickle in in the coming months but we are also still likely to see some continued demand from the Corporates that is likely to keep the shilling buoying within the 3600 -3800 levels.

QN: Were there any regulatory or monetary policy developments registered this quarter? If any, which are they and what are their implications?

During August 2023, the Monetary Policy Committee reduced the Central Bank Rate (CBR) by 0.50% to 9.50% from 10.00% in a bid to stimulate economic activity by reducing the cost of credit.

They also reduced the Cash Reserve Requirement to 9.50% from 10%. The reduction in CBR rates has led to a slight reduction in short-term Money Market yields, but this has not yet fully filtered into the lending rates since there is usually a lag effect. Overall, yields on government securities also remain relatively elevated.