Shilling projected to remain weak this week

The Uganda shilling was on the back foot in the first full trading session of the year, inching lower as both global and domestic market dynamics weighed in last week.

By Tuesday morning, Bank of Uganda quoted the local unit at 3,625/35 slightly weaker than Monday's close of 3,624/34 buying and selling respectively.

The unit shed off close to 35/= during the week to trade in the range of 3625/35.

Stephen Kaboyo, a financial expert, said locally foreign exchange flows were scanty as export flows were expected to underperform while the end of year diaspora flows were not significant.

In the international currency markets, the US dollar hit a 14-year peak against the major currencies as investors took their bets on the greenback.

"The dollar rally was fueled by expectation that the Trump incoming administration is likely to cut taxes, boost fiscal spending and carry through with its trade protectionist policies," said Kaboyo.

"Going forward, the shilling will remain vulnerable to the domestic macro-economic imbalances and the global dollar strength, as these two factors will continue to place the currency at risk of weakening further."

In the first treasury auction of the year, the benchmark 91 together with the 182-day went up slightly to trade at 13.409% and 14.628% respectively, while the 364 day declined at 15.501%, where a total of 165 billion was on offer.

Senior economist Dr. Fred Muhumuza attributed the weakening of the shilling to the reduction of remittances in November and December, the economic hardships that had hit the country in 2016 and the dividends in most companies being withdrawn for the festive season.

In addition, there were less exports as a result of the drought season putting strain on the dollar and World Bank withdrawal of funds.

"The shilling might not gain much during this period. It may continue to range between 35 and above," said Muhumuza.

He however noted that he does not see exports recovering this year. Much as Uganda is an agricultural country, there were some factors that led to a drop which still exist.

"We might get a few foreign exchange currencies from tourism but following the Kasese mischief, this might not be easy to attain."

Muhumuza said there is demand for the dollar from government projects which has caused the budget to be strained, adding that the cutting of the government budget will see less strain on the dollar hence the shilling gaining value.