Press "Enter" to skip to content

MARK KIDAMBA: The real reason for the Uganda shilling gains against the dollar the past one year

Central Press Syndicate - Uganda. Read, Enjoy and Share the Latest News from Uganda

                            Mark Kidamba, aIndependent Financial Analyst (PHOTO/Courtesy).

KAMPALA – It was revealed, much to the astonishment of Ugandans in a Bloomberg article last week, that the Uganda shilling was Africa’s third best performing currency this year; gaining over 4% against the US Dollar.Bold rebuttals on Bank of Uganda’s official Twitter page like: “Let’s stop lying please!” and “let us be guided” to interjections like: “How!” followed this revelation.
As is, the statement is accurate because the shilling has gained 176.12 shillings against the dollar in the past one year translating to a 5% increase.
This in no way implies the shilling is one of the strongest currencies in Africa, it only construes it’s performance against the dollar- the international reserve currency, as greatly improved.
The cardinal explanation for the gain of the shilling is quantitative easing in the US. The Federal Reserve (Fed) has injected up to $8.3T as of August 2021. This has been in the form of buying bonds monthly (over $120B with the initial purchase in March 2020 of $700B); in-addition to the COVID stimulus plan which saw $1.9T pumped into the economy. This was done to stimulate economic growth.
This increase in money supply has watered down the value of the dollar against many currencies- the Uganda shilling inclusive.
The high Ugandan bond rates and yields in the open market, are one of the highest in the world only behind Argentina 47%, Venezuela 46.5% and Zambia 33.5%.
Ugandan bond yields at 14% for 10 year bonds, 12% for 5 year bonds and 11% for 3 year bonds have been classified as speculative and have attracted investors; reducing the supply of the shilling in the system thereby making it more valuable.
The Uganda shilling, has been likely strengthened by eased deleveraging. Deleveraging, is the setting off, or reduction of one’s debts. Uganda is not monetarily sovereign which means it borrows in foreign currency- the dollar, and pays it’s debt in the same medium.
Uganda’s debt is projected to be $20B in 2021 translating to 50% of GDP. According to a Ministry of Finance Public Debt Report presented to the parliament in March 2020, by the Minister, the interest Uganda paid its domestic creditors was 1.3TN shillings ($387.6m) for the year 2019/2020, and $136m for external creditors; bringing the total amount for debt servicing to $523.6m.
Earlier this year, the finance Minister– Matia Kasaija had laid out a plan to approach the country’s biggest creditors in World bank, IMF and China to ask them to grant the country a leniency term of up to two years of not servicing the debt.
This means, a considerable slice of the money (dollars) that could have been paid to creditors for loan servicing, is still in the system. The loan leniency accompanied by the tapering of BoU through high interest rates and bond yields, and a high central bank rate, have raised the value of the shilling against the dollar.
This year alone, Uganda has received $156m in aid from the US: one among many donors. This aid has been doled out to sectors that continue to remain closed like education.
The support, is dished out in dollars, and continued closure of these sectors, adds to their volume in the system; diminishing their value against the tapered shilling.
Further, the ground-breaking of the East African Crude Oil Pipeline (EACOP); has precipitated foreign capital inflow for ongoing projects like the Hoima International airport, that has already realised $365m for ongoing construction according to the Ministry of Works and Transport. About $3.5B is needed for the EACOP project, it’s evident that a substantial amount has been picked up to fund activities that are underway, like the resettlement of project affected persons.
This has resulted in foreign direct investment in dollars ramping up their circulation in the system.
However, currencies appreciate all the time against the dollar but it doesn’t directly translate into a strong economy, the shilling is no exception as Uganda’s economy is a frail one. It is ingrained with high levels of unemployment and under-employment, high inflationary pressures on food, fuel, real estate. The perpetual balking of multi-national corporations speaks to the grim reality of the Ugandan situation.
The economy, has experienced the demise of a myriad of small and medium enterprises, mostly run by natives because of a lack of support from the aftershock of the pandemic; not to mention high tax regimes mostly targeting natives with the most recent manifesting as a 12% internet tax on data.
It is common knowledge that the Uganda shilling build up over the dollar is evanescent because the Fed is planning a taper by slowing down its bond purchases and increasing interest rates. This will give the US dollar a boost against major currencies, the shilling inclusive.
In between times, Ugandans should strive to enjoy the privileges that come with a stronger currency namely: traveling, importing and even buying more dollars now to trade later when the dollar appreciates.
Mark Kidamba is a financial, investment analyst.
Twitter: @m_kidamba

Related

Continue Reading News Article -->>

Uganda News:   Ali Bayo Pens Two Years Deal at SC Villa

Be First to Comment

Leave a Reply