Defending the shilling is unsustainable - Bank of Uganda Governor, Mutebile

Central Bank governor Emmanuel Tumusiime Mutebile has said Bank of Uganda will no longer inject no more dollars in the currency markets because it is not sustainable.

Click Here to view the full Statement.

Experts have warned the shilling risks ‘collapsing’ if the Central Bank does not come up with strict and long term measures to save the unit.

Mr Aly Khan Satchu, a Nairobi- based financial analyst with focus on East Africa, said Uganda needs to carry out home-grown austerity measures to save its currency, instead of relying on capital injections and foreign borrowing.

“He (Mutebile) is admitting that the Shilling is being buffeted by forces beyond his control. He wants to conserve his hard currency and not burn it up defending the indefensible,” Mr Satchu told Daily Monitor via an email exchange in reaction to a speech by the Central Bank Governor, Mr Emmanuel Tumusiime Mutebile, admitting it would not be sustainable to inject dollars in the currency markets with a view of propping up the shilling in the face of increased volatility.

“It is not sustainable for the Bank of Uganda to try and prop up the exchange rate, at levels which are not consistent with supply and demand in the foreign exchange market, by intervening and selling foreign currency. The BoU would simply deplete its foreign exchange reserves if it attempted to do this.”

The Governor was speaking at a meeting organised by Uganda Manufacturers’ Association in Kampala last week.
The Shilling, according to the Central Bank, has shed 27 per cent of its value since the year begun.
Dr Fred Muhumuza, the managing partner at KPMG said Mr Mutebile was right, since the Central Bank does not print dollars.

Bank of Uganda has since January injected more than $200m (about Shs693b) in the currency market, seeking to calm the speed at which the Shilling depreciates.

Yesterday, the unit opened at Shs3,439.39 on the buying side and Shs3,449.39 on the selling side, before falling further to Shs3,464.7 and Shs3,474.7 respectively.

Experts also say the strong recovery of the US economy, strong dollar and the current crisis in the Euro Zone, have had adverse effects on the local unit.


Other economic fundamental have also been volatile, with inflation rising to 4.9 per cent and interest rates averaging at 23 per cent.

Mr Amos Nzei, the chairperson Uganda Manufacturers Association, urged government to save them from the increasing cost of doing business, saying “given the weak Shilling, government should at least compensate us with reduction on the cost of electricity.

Experts also warned that the Shilling might depreciate further, considering that electioneering money has started to get into the economy ahead of the 2016 polls.
Mr Mutebile, however, urged Ugandans to buy more locally manufactured goods in the face of rising import product prices.

“… depreciation can help the Ugandan economy adjust to a more challenging external environment, by boosting the competitiveness of traded goods industries, including manufacturing industries, and by encouraging Ugandans to purchase domestically produced goods rather than imports.

However, Dr Muhumuza, warned that buying ‘Ugandan’ might be challenging in the short term since “issue of promoting domestic production is not an immediate solution especially that local manufacturers are currently struggling to do business.”

Taking advantage
Mr Stephen Kaboyo, the managing partner at Alpha Capital, a forex analyst firm, said in the face of the weak Shilling Uganda’s exports would become more competitive, saying manufacturers should take advantage of the situation.

The Monitor Newspaper
07-July-2015