The depreciation of the U.S. dollar globally coupled with its increased inflows in Uganda by investors in government securities and private remittances have helped the Uganda shilling appreciate by 6.3 percent in May on an annual basis.
Adam Mugume, executive director of research at Bank of Uganda, the country’s central bank, told Xinhua in an interview on Tuesday that the shilling has seen a persistent appreciation trend since January 2021 through May.
Mugume said the May appreciation was strong, registering a 6.3 percent year on year and a 1.95 percent month-on-month appreciation.
“The appreciation of the shilling has been due to several factors: first the dollar has been weakening since January 2021. Second, on the domestic scene, Uganda has been receiving strong forex inflows, especially portfolio inflows, attracted by yields on government securities in comparison with yield obtainable on safe-haven investments in advanced economies,” Mugume said.
Due to a revenue shortfall because of the negative impact of COVID-19, Uganda was forced to issue more treasury bills and treasury bonds. This, according to experts, resulted in the rise in government interest rates, which have attracted foreign investors to come back into Uganda’s debt market.
Mugume said at the end of May, offshore holding of government securities was about 700 million dollars, up from about 280 million dollars a year ago. Workers’ remittances have also been strong, totaling about 840 million dollars between July 2020 and April 2021.
He said the domestic demand for dollars is still subdued although recovering. The domestic demand for dollars is associated with import demands.
On whether the shilling appreciation, which hurts exports, will persist, Mugume said it all depends on several factors for instance on how the dollar and other international currencies will trend in the coming months.
“If the advanced economies reverse their monetary policy easing stance, this could cause taper tantrum resulting in offshore investors in the domestic market to free back into currencies regarded as safe haven,” Mugume said.
“Also, the international oil prices have been on the rise since the beginning of the year and this results in increased demand for forex to import the same quantity of oil. Therefore, should oil prices continue rising, this will ultimately spill over into the forex market,” he added.