Shilling flat as central bank tightens liquidity

KAMPALA - The Ugandan shilling held flat against the dollar on Friday after the central bank tightened liquidity by mopping up shillings from the interbank market.

Commercial banks in Kampala quoted the currency of east Africa's third-largest economy at 2,605/2,615, unchanged from Thursday's close.

The shilling has been bearish this week, sapped by strong demand for dollars from importers rushing to stock goods for holiday shoppers and offshore investors closing their local currency positions ahead of of the end of the year.

"Appetite for the dollar is still very huge but the central bank has done a repo and now the market doesn't have that much shillings to buy dollars," said Ahmed Kalule, trader at Bank of Africa.

He said that some energy firms and manufacturers, who account for the majority of dollar demand, were holding off on purchases of the dollar, considering it overpriced at above 2,600.

"They believe it will probably climb down to below 2,600 again in a few days and then they will come in again."

The shilling has lost 5.1 percent against the dollar so far this year, its value partly eroded by the central bank's lowering of interest rates to prop up sagging economic growth.

This month Bank of Uganda (BoU) cut its key lending rate by 50 basis points to 12.5 percent from October's 13 percent, slowing down the rate of its policy easing, a move analysts say might offer the shilling support in the medium term.

"Trading activity is very slow...demand generally tends to ease off as we move into the weekend but overall the shilling remains struggling against high importer demand," said Faisal Bukenya, head of market making at Barclays Bank.

Inflows from foreign Ugandan workers returning home for Christmas, he said, might limit the shilling's losses in the coming weeks.