Shilling stable, seen firming due to tight liquidity

KAMPALA - The Ugandan shilling was stable on Friday in thin trading but was expected to strengthen next week due to scarce local currency liquidity.

Commercial banks quoted the currency of east Africa's third-largest economy at 2,465/2,471 to the dollar, compared with Thursday's close of 2,468/2,473.

"The market is flat in terms of activity although there's a shortage of shillings which has potential to boost the unit possibly next week," said Manohar Miryala, head of treasury at Crane Bank.

Soft demand for dollars, mostly from companies, has kept the shilling on a firm footing this year with traders saying the weak appetite for hard currency reflected sagging business activity.

Money market analysts have attributed slow business activity to what they say is the high cost of credit. Commercial banks' average lending rate, according to the central bank, stood at 22.5 percent in December, compared to the central bank's key policy rate of 11.5 percent currently.

On Thursday the Ugandan government announced it had signed a memorandum of understanding with three foreign oil companies - Britain's Tullow Oil, France's Total and China's CNOOC - that should kick off investments in key infrastructure necessary for crude production to start.

"Even in the medium to long-term the outlook suggests a strong shilling ... I expect to see capital investments to start flowing into the oil sector after yesterday's deal," said a trader at a leading commercial bank.

"Although most of the procurements will be in dollars, some of them will be in the local currency and the shilling will benefit from these conversions by oil investors."

Reuters