The Ugandan shilling rose against the dollar on Wednesday amid thin liquidity as corporate firms held onto their local currency holdings in preparation for mid-month tax payments.
At 1140 GMT commercial banks in Kampala quoted the currency of east Africa's third-largest economy at 2,640/2,650, stronger than Wednesday's close of 2,645/2,655.
"VAT (valued added tax) payments have to be effected by 15th of every month so currently big market players are tight with their shillings," said Thaib Lubega, trader at Stanbic Bank.
"As a result shillings are scarce, thus the gains we've seen today."
The shilling is up 1.7 percent against the dollar this year largely by thin appetite for the greenback but the local currency finished 2012 nearly 8 percent down.
Money market analysts expect that the central bank having held its key lending rate at 12 percent for two straight months will help keep rates on government debt attractive and maintain the shilling on a firm footing in the near-term.
The Ugandan government has told the IMF it intends to scale up domestic borrowing in 2012/13 (July-June)financial year to raise money to meet a funding gap worth $282 million caused western donor aid cuts.
"If the government steps up its borrowing we would expect it to generate confidence for the shilling as it signals prospects for higher flows of hard currency from foreign investors," said Ahmed Kalule, trader at Bank of Africa.
"So considering that prospect and the persisting weak demand for dollars I see the shilling testing the key psychological level of 2,600 very soon." Reuters