Shilling lives to die another day

The shilling continues to stabilze Just over a month ago, the United States dollar was dangerously close to breaching the Uganda Shs 4,000 level as panic over the impact of the Coronavirus spread across financial markets.

With many countries moving into lockdown mode as a measure of containing the spread of the virus, many believed that converting local currencies into the more internationally-trusted asset of the United States dollar was smart business.

Fears that local investors would dump the Uganda shilling and take refuge in the safe haven of the US currency market started spreading fast. Indeed, that mad rush among Ugandan currency speculators happened for a while.

“As a result of global financial markets turbulence and the rush by investors to hold US dollars, the exchange rate depreciated from the average of Shs 3,676.9 per US$ in February 2020 to close at Shs 3,918 on March 24, 2020,” Dr. Adam Mugume, the executive director of Research at Bank of Uganda, said recently during a Webinar organized by Stanbic bank.

For emphasis, analysts said the Central Bank did not have enough firepower to protect the shilling from a thorough beating by the dollar as the virus caused havoc across global economies.

The value of the dollar is important to most Ugandans. For example, if the dollar appreciates against the Uganda shilling, there are high chances that the price one pays for electricity will be high. It also means that fuel companies will increase the price of their products, translating into higher transport fares.

This is because most of these companies – those in the electricity and fuel industry – pay most of their operation costs in dollars. Exporters, on the other hand, would, theoretically, earn more money from a weaker shilling. But considering that they need certain imported items as a raw material in their production lines, such as clinker for the cement companies, their earnings would not be as much if the dollar has strengthened against the shilling.

Today, however, the shilling remains alive, and lives to die another day. While the shilling has depreciated to some level, it has resisted any push over the Shs 4,000 barrier, and swings casually in the Shs 3,750 and Shs 3,850 price range as if life is normal. In fact, in East Africa, only the Tanzania shilling and the Rwanda Franc – two currencies that have a lot of government support – have performed better than the Uganda […]

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