Dollar crisis strikes Uganda
THE central bank on Wednesday surprised everybody by buying dollars from a market already starved of the US currency to push it to a six-year high against the shilling, currency dealers said.
By Sylvia Juuko and David Muwanga
THE central bank on Wednesday surprised everybody by buying dollars from a market already starved of the US currency to push it to a six-year high against the shilling, currency dealers said.
The intervention moved the dollar in the inter-bank market to 2,145 from 2,082. The local unit was trading at 2,165 on Thursday.
Currency dealers estimate the central bank bought over $10m. Bank of Uganda officials declined to comment on the extent of their intervention but acknowledged they had been in the market.
Businessmen warn that the sharp appreciation of the dollar will strain profit margins and compel them into tougher costcutting measures that will include job cuts.
Economists also predict tougher times for individuals as a weak shilling coming against the background of global financial market turmoil will impact on remittances, exports and donor flows in the second half of this financial year.
“The cost of inputs is expected to rise. This cost will be transferred to consumers. If the exchange rate movements become inflationary, income will take a hit and people will have less disposable income,†one economist said.
“It has already started but if the shilling continues downwards against the dollar, jobs will be lost, hundreds of jobs.†Several companies have already laid off workers.
Earlier this month, a telecom company let 35 workers go, as did Barclays Bank where it was reported 200 people were laid off.
Shell Uganda country chairman Ivan Kyayonka said a strong dollar would push pump prices up because the cost of the product and transportation were paid for in the US currency.
“Nearly two-thirds of the cost of getting the fuel product is paid for in dollars. If you have a weak shilling, the downward trend in pump prices we are currently seeing will either slow down or the cost of fuel will inch upwards,†Kyayonka said.
And since fuel is an input into every product, a continued shilling weakness will trickle down to all products, manufacturers said.
“Countries like Uganda, where there are more imports than exports, will suffer more because the increasing costs of production will lead to rising prices for all products,†S.C. Sharma, the managing director of Metha Group, said yesterday.
James Kalibala, the outgoing UMA chairman, said:
“The rise in the exchange rate has led to manufacturers spending more than what we earn. As a result, profits have gone down, leading to slow business growth or no growth at all.
You would expect Ugandan exporters to earn more, but worldwide prices have gone down and so Uganda’s exporters are earning less.â€
The last time the dollar touched these levels was in August 2003.
The central bank usually intervenes in the foreign market to smoothen out currency movements. But Wednesday’s action created more volatility and widened the difference between buying and selling rates from sh5 to sh20. Widening spreads often point to a large imbalance in supply and demand which forces the price up or down.
Lucas Ochienge, the head of treasury at United Bank for Africa Uganda, described the central bank action as “unusual.â€
He said the action came at a time when the market was in need of dollars as some banks and companies were covering dividend requirements.
The dollar has been appreciating against the shilling since the beginning of the year mainly driven by offshore investors liquidating billions of shillings in the Treasury Bill holdings and buying dollars to repatriate their money.
The dollar was trading at sh1,640 in September last year before the news of the credit crunch broke and forced foreign investors to liquidate local investments.
“The market is generally short of dollars with demand piling up. The central bank needs to intervene otherwise we may head to 2,500 levels in the near future,†said Catherine Bulinda, the head of treasury at Centenary Bank.
The dollar rose above the sh2,000 mark at the beginning of March on higher corporate and offshore investors demand for it, while dollar inflows from non-governmental agencies and export receipts remained weak.
THE central bank on Wednesday surprised everybody by buying dollars from a market already starved of the US currency to push it to a six-year high against the shilling, currency dealers said.
The intervention moved the dollar in the inter-bank market to 2,145 from 2,082. The local unit was trading at 2,165 on Thursday.
Currency dealers estimate the central bank bought over $10m. Bank of Uganda officials declined to comment on the extent of their intervention but acknowledged they had been in the market.
Businessmen warn that the sharp appreciation of the dollar will strain profit margins and compel them into tougher costcutting measures that will include job cuts.
Economists also predict tougher times for individuals as a weak shilling coming against the background of global financial market turmoil will impact on remittances, exports and donor flows in the second half of this financial year.
“The cost of inputs is expected to rise. This cost will be transferred to consumers. If the exchange rate movements become inflationary, income will take a hit and people will have less disposable income,†one economist said.
“It has already started but if the shilling continues downwards against the dollar, jobs will be lost, hundreds of jobs.†Several companies have already laid off workers.
Earlier this month, a telecom company let 35 workers go, as did Barclays Bank where it was reported 200 people were laid off.
Shell Uganda country chairman Ivan Kyayonka said a strong dollar would push pump prices up because the cost of the product and transportation were paid for in the US currency.
“Nearly two-thirds of the cost of getting the fuel product is paid for in dollars. If you have a weak shilling, the downward trend in pump prices we are currently seeing will either slow down or the cost of fuel will inch upwards,†Kyayonka said.
And since fuel is an input into every product, a continued shilling weakness will trickle down to all products, manufacturers said.
“Countries like Uganda, where there are more imports than exports, will suffer more because the increasing costs of production will lead to rising prices for all products,†S.C. Sharma, the managing director of Metha Group, said yesterday.
James Kalibala, the outgoing UMA chairman, said:
“The rise in the exchange rate has led to manufacturers spending more than what we earn. As a result, profits have gone down, leading to slow business growth or no growth at all.
You would expect Ugandan exporters to earn more, but worldwide prices have gone down and so Uganda’s exporters are earning less.â€
The last time the dollar touched these levels was in August 2003.
The central bank usually intervenes in the foreign market to smoothen out currency movements. But Wednesday’s action created more volatility and widened the difference between buying and selling rates from sh5 to sh20. Widening spreads often point to a large imbalance in supply and demand which forces the price up or down.
Lucas Ochienge, the head of treasury at United Bank for Africa Uganda, described the central bank action as “unusual.â€
He said the action came at a time when the market was in need of dollars as some banks and companies were covering dividend requirements.
The dollar has been appreciating against the shilling since the beginning of the year mainly driven by offshore investors liquidating billions of shillings in the Treasury Bill holdings and buying dollars to repatriate their money.
The dollar was trading at sh1,640 in September last year before the news of the credit crunch broke and forced foreign investors to liquidate local investments.
“The market is generally short of dollars with demand piling up. The central bank needs to intervene otherwise we may head to 2,500 levels in the near future,†said Catherine Bulinda, the head of treasury at Centenary Bank.
The dollar rose above the sh2,000 mark at the beginning of March on higher corporate and offshore investors demand for it, while dollar inflows from non-governmental agencies and export receipts remained weak.