Central Bank ready to tame volatile shilling
Dec 10, 2009
THE Central bank is planning more frequent interventions in the foreign exchange market to minimise the negative impact of a fast-appreciating shilling on the economy, according to a top official.
By Sylvia Juuko
THE Central bank is planning more frequent interventions in the foreign exchange market to minimise the negative impact of a fast-appreciating shilling on the economy, according to a top official.
“In addition to intervening to smoothen out volatility, we will until further notice intervene to stop excessive appreciation of the exchange rate,†he Tumusiime Mutebile, the governor, announced recently.
Mutebile said the central bank was determined to ensure that the appreciation of the exchange rate would not lead to an unnecessary reduction in aggregate domestic demand.
“We will use every device at our disposal to ensure that this does not happen and that the economy remains buoyant,†he told bankers during their inaugural annual dinner at the Sheraton Kampala Hotel over the weekend.
“I have said before that we are not committed to a particular exchange rate in the economy, but because of the problems that are happening now which lead to a reduction in domestic demand, Bank of Uganda will for some time now attempt to ensure that the appreciation of the exchange rate does not worsen the situation regarding aggregate demand,†he explained.
While the announcement of the Bank of Uganda (BOU) action is unusual, Mutebile emphasised that he was not changing the policy of not having an exchange level to defend.
“We will not allow the appreciation of the exchange rate to cause further problems to our goals.
“I am not changing the rule we have followed all this while that BOU will not intervene in the market except when there is volatility.â€
Mutebile noted that lower growth in aggregate demand had reduced Uganda’s real gross domestic product (GDP) growth to 7% in the 2008/2009 financial year, down from the projected 9.5%.
The shilling has since June appreciated against the greenback, trading at 1,860/1,870 to the dollar after shedding over 25% of its value between August 2008 and May 2009. This compares to 1,945/1,950 it traded around the same period last year.
Central bank attributes the appreciation to a combination factors including dollar flows from offshore investors who have returned to the market, remittances from Ugandans abroad, increased export receipts backed by improved regional trade and commercial banks unwinding their long dollar positions.
This comes at a time when the market is characterised by low dollar demand, a common phenomenon during this time of the year as most corporate players repatriate their dividends and most businesses wind down.
The depreciation of the shilling between August 2008 and July 2009 was precipitated by dollar purchase by offshore investors who chose to liquidate their holdings in government securities as credit dried up due to the global economic recession.
Central bank figures show that last year, offshore investors repatriated over $300m (over sh600b) from the market at the height of the crisis.
Analysts say central bank’s strong reserve position standing at 5.6 months of future import cover as at end of September 2009, will give it room to manoeuvre and at the same time create more buffer through purchase of dollars.
“We are going to intervene a little bit more on the buy side. If dollars are too many in the economy, we will buy and give more shillings and restore balance.
“It is a temporary measure and we are not changing policy because it is a liberalised economy,†explained Byabakama Kaberenge, the acting deputy governor.
“Do not get too surprised if you hear that the BOU has bought $10m or $30m.
“We will not be fixing the rate but want a gradual movement in the exchange rate. It should not send mixed signals.
“All we are saying is that exporters should continue to trade.â€
He noted that the central bank was not in a position to stop the appreciation of the shilling because it was due to the effect of supply and demand.
“The real solution is in the real economy where the Government needs to make structural adjustments to ensure we have more exports. But we can use monetary instruments to temporarily manage the expectations so that exporters are not discouraged,†he added.
While a strong shilling favours importers, exporters are hurting because for every dollar earned, they will be getting fewer shillings.
“But if it (shilling) appreciates too fast, it also has its problems. The movement needs to be gradual, otherwise, the exporters will find it not profitable and get little money. Lots of businesses have already locked in contracts and a rapid movement makes the situation unpredictable.â€
In September, the central bank also commenced frequent interventions to stabilise short-term money market rates, which were characterised by volatility.
The bank’s action has since restored stability in the short-term money market rates. Short-term rates were at an all-time high partly due to slower government spending at the beginning of the July financial year.
Mutebile said the financial sector had remained resilient to the effects of the global downturn.
“The banking sector has remained largely profitable and solvent with average capital averaging 22% of risk weighted assets as in the third quarter of 2009,†he said.
Mutebile, however, noted that the sector was still dogged by high lending rates and lack of financial inclusion especially agricultural credit to the majority of the population.
While a strong shilling favours importers, exporters are hurting because for every dollar earned, they will be getting fewer shillings.
“But if it (shilling) appreciates too fast, it also has its problems. The movement needs to be gradual, otherwise, the exporters will find it not profitable and get little money.
Lots of businesses have already locked in contracts and a rapid movement makes the situation unpredictable.â€
In September, the central bank also commenced frequent interventions to stabilise short-term money market rates, which were characterised by volatility.
The bank’s action has since restored stability in the short-term money market rates. Short-term rates were at an all-time high partly due to slower government spending at the beginning of the July financial year. Mutebile said the financial sector had remained resilient to the effects of the global downturn.
“The banking sector has remained largely profitable and solvent with average capital averaging 22% of risk weighted assets as in the third quarter of 2009,†he said.
Mutebile, however, noted that the sector was still dogged by high lending rates and lack of financial inclusion.
THE Central bank is planning more frequent interventions in the foreign exchange market to minimise the negative impact of a fast-appreciating shilling on the economy, according to a top official.
“In addition to intervening to smoothen out volatility, we will until further notice intervene to stop excessive appreciation of the exchange rate,†he Tumusiime Mutebile, the governor, announced recently.
Mutebile said the central bank was determined to ensure that the appreciation of the exchange rate would not lead to an unnecessary reduction in aggregate domestic demand.
“We will use every device at our disposal to ensure that this does not happen and that the economy remains buoyant,†he told bankers during their inaugural annual dinner at the Sheraton Kampala Hotel over the weekend.
“I have said before that we are not committed to a particular exchange rate in the economy, but because of the problems that are happening now which lead to a reduction in domestic demand, Bank of Uganda will for some time now attempt to ensure that the appreciation of the exchange rate does not worsen the situation regarding aggregate demand,†he explained.
While the announcement of the Bank of Uganda (BOU) action is unusual, Mutebile emphasised that he was not changing the policy of not having an exchange level to defend.
“We will not allow the appreciation of the exchange rate to cause further problems to our goals.
“I am not changing the rule we have followed all this while that BOU will not intervene in the market except when there is volatility.â€
Mutebile noted that lower growth in aggregate demand had reduced Uganda’s real gross domestic product (GDP) growth to 7% in the 2008/2009 financial year, down from the projected 9.5%.
The shilling has since June appreciated against the greenback, trading at 1,860/1,870 to the dollar after shedding over 25% of its value between August 2008 and May 2009. This compares to 1,945/1,950 it traded around the same period last year.
Central bank attributes the appreciation to a combination factors including dollar flows from offshore investors who have returned to the market, remittances from Ugandans abroad, increased export receipts backed by improved regional trade and commercial banks unwinding their long dollar positions.
This comes at a time when the market is characterised by low dollar demand, a common phenomenon during this time of the year as most corporate players repatriate their dividends and most businesses wind down.
The depreciation of the shilling between August 2008 and July 2009 was precipitated by dollar purchase by offshore investors who chose to liquidate their holdings in government securities as credit dried up due to the global economic recession.
Central bank figures show that last year, offshore investors repatriated over $300m (over sh600b) from the market at the height of the crisis.
Analysts say central bank’s strong reserve position standing at 5.6 months of future import cover as at end of September 2009, will give it room to manoeuvre and at the same time create more buffer through purchase of dollars.
“We are going to intervene a little bit more on the buy side. If dollars are too many in the economy, we will buy and give more shillings and restore balance.
“It is a temporary measure and we are not changing policy because it is a liberalised economy,†explained Byabakama Kaberenge, the acting deputy governor.
“Do not get too surprised if you hear that the BOU has bought $10m or $30m.
“We will not be fixing the rate but want a gradual movement in the exchange rate. It should not send mixed signals.
“All we are saying is that exporters should continue to trade.â€
He noted that the central bank was not in a position to stop the appreciation of the shilling because it was due to the effect of supply and demand.
“The real solution is in the real economy where the Government needs to make structural adjustments to ensure we have more exports. But we can use monetary instruments to temporarily manage the expectations so that exporters are not discouraged,†he added.
While a strong shilling favours importers, exporters are hurting because for every dollar earned, they will be getting fewer shillings.
“But if it (shilling) appreciates too fast, it also has its problems. The movement needs to be gradual, otherwise, the exporters will find it not profitable and get little money. Lots of businesses have already locked in contracts and a rapid movement makes the situation unpredictable.â€
In September, the central bank also commenced frequent interventions to stabilise short-term money market rates, which were characterised by volatility.
The bank’s action has since restored stability in the short-term money market rates. Short-term rates were at an all-time high partly due to slower government spending at the beginning of the July financial year.
Mutebile said the financial sector had remained resilient to the effects of the global downturn.
“The banking sector has remained largely profitable and solvent with average capital averaging 22% of risk weighted assets as in the third quarter of 2009,†he said.
Mutebile, however, noted that the sector was still dogged by high lending rates and lack of financial inclusion especially agricultural credit to the majority of the population.
While a strong shilling favours importers, exporters are hurting because for every dollar earned, they will be getting fewer shillings.
“But if it (shilling) appreciates too fast, it also has its problems. The movement needs to be gradual, otherwise, the exporters will find it not profitable and get little money.
Lots of businesses have already locked in contracts and a rapid movement makes the situation unpredictable.â€
In September, the central bank also commenced frequent interventions to stabilise short-term money market rates, which were characterised by volatility.
The bank’s action has since restored stability in the short-term money market rates. Short-term rates were at an all-time high partly due to slower government spending at the beginning of the July financial year. Mutebile said the financial sector had remained resilient to the effects of the global downturn.
“The banking sector has remained largely profitable and solvent with average capital averaging 22% of risk weighted assets as in the third quarter of 2009,†he said.
Mutebile, however, noted that the sector was still dogged by high lending rates and lack of financial inclusion.