By Silvia Nyambura
The nation is abuzz with news of the record breaking dollar hike currently trading at Ushs 3,075 buying and Ushs 3,095 selling. This is the highest the shilling has weakened against the dollar in the history of the country. Some observers have speculated it could go up to the Ushs 3,500 mark given the fact that 2016 is an election year. Direct effects of this increase according to experts include rise in price of commodities and cost of living. This is attributed to the fact that Uganda consumes more than it produces being a country highly dependent on imports.
An example is fuel prices which had begun to depreciate gradually but now players in the sector are being forced to reconsider the drop and increase them again. Previously petrol prices were averaging Ushs 3,650 in most stations which then dropped to an average Ushs 3,400/3,450. According to a player in the sector who sought to remain anonymous, the volatility of the dollar has led players to reconsider increasing prices starting today. This will in turn increase the cost of transport as well as utilities such as electricity. Other consumables like beverages, personal hygiene products and so on that are manufactured with imported raw materials are also expected to become more costly.
Yesterday, the Bank of Uganda (BOU) in a bid to ease the situation injected about USD 60 million which has not seemed to help the state of affairs. By the time BOU took this action, the shilling was trading at Ushs 3,038/Ushs 3,048 meaning as of today it has increased by a little over 1 percent.
Despite the fact that it has failed to stem the volatility of the shilling clearly bringing no relief to the market, the intervention from BOU is expected to be the short term solution to this problem. In the long run however, Uganda has to work on increasing productivity to bring dependence on the dollar to a manageable level if not zero reliance.
In response to the market today BOU has released a statement attributing the volatility to strengthened dollar against the global currencies. The statement also explains Uganda’s demand for dollars has increased strongly, mainly from the corporate sector, to fund imports and dividend payments to foreign shareholders following improved corporate profits in 2015.
“Unfortunately export earnings have declined mainly because of problems in regional markets, hence the current account deficit has widened. The BOU’s policy is not to peg the exchange rate or otherwise prevent it from adjusting to levels which are sustainable in the long run. However, when exchange rate movements are too rapid, the BOU will intervene to dampen volatility,” the statement reads in part.
The bank says as per the macroeconomic framework put in place in 2011, it will not finance Government borrowing but instead will use its policy interest rate to forestall any danger of inflation rising above the medium term policy target of 5 percent.
Nyambura is a senior journalist based in Kampala
Nov 13, 2013 2