Bank of Uganda explains Uganda shilling fall against the US dollar -Mar 12, 2015

Uganda’s exchange rate against the US dollar, in common with those of many other countries around the world, has come under strong pressure in recent weeks.

This is mainly for two reasons. First the dollar has itself strengthened dramatically on global markets, for example by 13 percent against the Euro since the start of 2015.

Second, in Uganda 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. After a sharp fall in the Shilling in mid morning, the BoU intervened and sold dollars, which restored some stability to the market.

There has been concern voiced in the media about a re-run of the instability of 2011, especially because of fears of election related public spending, and these concerns may be contributing to the pressure on the exchange rate.

There are, however, major differences between the situation in 2011 and that of today. In particular, under the macroeconomic framework that has been put in place since 2011 the BoU will not finance Government borrowing and it will use its policy interest rate to forestall any danger of inflation rising above the medium term policy target of 5 percent.

The strength of Uganda’s macroeconomic framework has been recognized by, among others, the international credit rating agencies. For example, Fitch upgraded Uganda’s sovereign credit rating from B to B+ on February 15, 2015, citing in particular Uganda’s good track record of prudent macroeconomic policies supporting robust growth, a statement issued by Bank of Uganda said.

The New vision Newspaper
Mar 12, 2015