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Why the shilling is depreciating 

Between 2021 and early 2022, the Uganda shilling gained against the dollar. From early March 2022, the shilling took on a downward depreciation spiral till to date.

While delivering the 2022/23 financial year budget speech, Finance minister Matia Kasaija confirmed that the shilling had strengthened in the past year, appreciating by 2.3 per cent between April 2021 and April 2022. Kasaija emphasized that the appreciation was on account of higher dollar inflows from Uganda’s exports, foreign direct investments, and foreigners buying government treasury bills and bonds. 

In the same speech, Kasaija noted that the shilling had experienced significant depreciation pressures since March 2022 on account of concerns arising from the Ukraine - Russia conflict and related sanctions as well as the rising interest rates in advanced economies.

“The shilling depreciated by 1.7 per cent month on month on average in the three months to June 2022 and by 6.7 per cent against the US dollar between June 2021 and June 2022. The Bank of Uganda is taking appropriate measures to avoid volatile fluctuations, but not preventing the exchange rate movements.”

In early June, 2022, the Bank of Uganda increased its key policy Rate that influences the price of credit in the market, the Central Bank rate to 7.5 per cent from 6.5 per cent to control the rising prices of goods and services.

Speaking anonymously, a top executive from one of Uganda’s leading commercial banks indicated that raising the central bank rate will only make borrowing expensive.

“Expensive finance makes [it difficult to] access the much-needed capital to grow our industries... Since we import more than we export, all these measures are aimed at avoiding imported inflation, not exchange rate movements, which is the country’s biggest issue,” he said.

On the other hand, Alex Kakande, a financial expert and auditor with accounting firm Ernst and Young, agreed that the reduced importation of goods due to limited demand driven by the pandemic, and the growing export earnings in 2021 from gold and coffee contributed to the strong shilling. 

He added that the increased revenue inflows from the exportation of gold between 2020 and 2021 could have also kept the shilling stable against the dollar and also increased Uganda’s dollar reserves.

It is believed Uganda earned approximately $6 billion in gold exports during the same period. He added that the activities surrounding the Final Investment Decision (FID) in the oil and gas sector and its eventual announcement on February 01, 2022 heightened speculation about the benefits that came with the FID announcement.

This speculation, Kakande explained, led to increased inflows of dollars into Uganda’s economy, thus continuing to strengthen the Ugandan shilling. Although all other currencies around East Africa were depreciating.

According to recent data from Bank of Uganda, the country has not registered any gold exports for the last three quarters of the current financial year, which ends at the end of June. Although Uganda has no registered gold exports this year, Kakande believes the March 2022 sanctioning of the African Gold Refinery by the United States of America greatly contributed to the depreciation of the shilling.

“Financial fluctuations are mostly driven by speculation. If the market speculates that things are either or will be alright, the market will respond positively. If the market didn’t determine that gold exports had been cut off in July 2021, then the market couldn’t respond to that,” he said.
Kakande anticipated that since the international market payment terms average between 120 and 180 days from export to receipt of payments, payments for gold exported in early 2021 could have been received between June and December 2021, which boosted the reserves.  

Kakande said the financial hardships in the Western world implied that Ugandans in the diaspora could no longer send money back home as much as they did a year ago. This, he said, reduced the much-needed foreign remittances, thus lowering Uganda’s foreign exchange reserves.

A 2021 report by Migration and Development indicated that remittances to Uganda by Ugandans abroad declined by 26 per cent from $1.4 billion in 2019 to $1.1 billion in 2020. This was partly blamed on the Covid-19 pandemic.

Asked whether it was possible for the shilling to regain strength against the dollar, Kakande said, “If we get the FID back, commitments from the governments of Tanzania and Uganda, Total, and Cnooc are expected to be a big boost, which could, in turn, restore confidence.

The recent announcement of the over $12 trillion gold discovery in Uganda will create more optimism for a rebound. It might take some few more months but these two rich resources – oil and gold - can give a big boost in terms of the dollar inflows but also in restoring the much-needed confidence to keep the dollar in check, Kakande predicted.

During his budget speech, Finance minister Matia Kasaija reiterated the commitment of the government of Uganda towards the development of the country’s oil and gas resources responsibly and sustainably for the benefit of all Ugandans.


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