By Sylvia Juuko

THE Uganda shilling, which has crossed the 2,100-mark against the dollar in recent weeks, is projected to remain weak due to lack of fundamentals to support it and the political risk, dealers said over the weekend.

The shilling last week hit its lowest in nine months, with market sentiment still pointing to a continued depreciation trend.

The last time the local currency traded at these rates was around June 2009 at a mid-rate of sh2, 137.2.
Dealers said the local unit closed the week lower at 2,135/2,140 compared to the previous Friday’s close of 2,085/2,090.

This was attributed to a general rise in demand from the energ and telecom sectors and interbank.

“We do not envisage any change in the trend over the next three weeks. We could see some stability the rates but the bias is on a weaker shilling,” said Mushabe Mashanyu, a trader at Standard Chartered Bank.

Mashanyu said low yields on government securities resulted in investors not rolling over their investments.

“There was some risk reduction by offshore investors as yields on treasuries seem to have bottomed out which put more pressure on the local unit.”

With the inflows currently outweighing the demand from corporate clients, the central bank was the biggest supplier of dollars.

It intervened on Thursday with minimal impact as the market continued on the deprecation trend, as commercial banks picked up dollars.

Juma Walusimbi, the director of communications, said the central bank sold $10m on Thursday.

He attributed the shilling’s sharp depreciation to level of demand for dollars outstripping supply.

The weak shilling is in line with the central bank’s measure of more frequent interventions in the foreign exchange market to minimise the negative impact of a fast-appreciating shilling on the economy.

Central bank governor Tumusiime Mutebile last year announced that the bank would temporarily lean on an appreciating shilling as a measure of boosting aggregate demand in the economy.
Dealers say with an election year looming, the local unit was likely to face some appreciation pressures.

“There is an election year coming ahead which poses a risk. People will buy and hold dollars due to the uncertainty which is likely to put more pressure on the shilling going forward,” said a currency trader.

Economists say while a strong shilling favours exporters, importers are hurting because they will need more shillings to purchase dollars.

“No policy makes everyone happy which is a challenge. A weaker shilling supports exports making them more competitive,” said Lawrence Bategeka, a research fellow at the Makerere University’s Economic Policy Research Centre.

Analysts say a weaker shilling may have impact on the economy since the country is a net importer, meaning that imported commodities become more expensive.
“Those who are importing oil and other commodities are feeling the pinch because they are using a strong dollar.
“This means that they will have to raise prices of these commodities,” notes Bategeka.

The cost has already been passed on to consumers with fuel pump prices revised upwards. Petrol costs sh2,750, up from sh2,400 per litre.

Companies that are importing inputs used to produce for the domestic market may also be forced to revise their prices upwards, making it costly to consumers.

Bategeka points out that rising prices may not result in inflationary pressures because food prices have been on the downward trend.

“Some prices of imports could rise. But because food prices are decreasing due to the bumper harvests, it will have an ameliorating effect,” he adds.

He, however, noted that if inflows in foreign exchange are due to shortfall in capital inflows and reduced off-budget support (non-governmental organisations), it could result in a negative impact in the long-run.

“If inflows are financing livelihoods, then welfare will be impacted.

“Also if these inflows are financing industry and investment then it will affect long-term growth.”