Depreciation of Shilling: Uganda faces high costs of debt repayment

by Christopher Kiiza
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The value of the Uganda shilling relative to the U.S. dollar continues to decline. In the Thursday trading session, the shilling again closed at a low point, with rates of Shs. 3,923 and Shs 3,933 for buying and selling, respectively.

This marks yet another significant drop compared to its performance in 2020 when it reached similar levels, hitting lows of 3,945 against the dollar. 

This trend suggests ongoing challenges for the Ugandan currency in maintaining its value against the dollar, indicating potential economic factors at play.

The ongoing vulnerability of the shilling appears inevitable, with the Central Bank unable to intervene effectively due to insufficient reserves to stabilize the rapidly depreciating local currency.

This situation not only poses challenges for monetary authorities but also carries significant implications for households, who may face increased inflationary pressures.

Additionally, the government must prepare for the repercussions, including elevated costs associated with servicing and repaying debts.

Typically, when a currency faces downward pressure, the Central Bank intervenes, but the current circumstances limit the Bank of Uganda’s capacity to address the situation due to its diminished reserve levels. This predicament underscores the urgency for strategic measures to address the root causes of the currency’s depreciation and bolster economic stability.

The depreciation of the Uganda shilling against the U.S dollar, moving from Shs 3,700 in June 2023 to Shs 3,970 as of yesterday (Wednesday), has resulted in a significant increase in the shilling equivalent of Uganda’s external debt.

This translates to a remarkable rise of 3.5 trillion shillings in Uganda’s external debt.

While not all of Uganda’s external public debt is denominated in U.S. dollars, this development provides a clear illustration of how fluctuations in the dollar’s value against other currencies impact the country’s debt repayment obligations.

This underscores the importance of monitoring exchange rate movements and their implications for fiscal management and debt sustainability.

Stephen Kaboyo, the Managing Director, Alpha Capital says the implications of Uganda shilling depreciating are far reaching.

“We should see this feeding into fuel prices, and fuel prices touch on every sector in the economy; the cost of production, cost of transport etc,” he said.

However, the Finance Ministry Permanent Secretary and Secretary to Treasury, Ramathan Ggoobi has said the foreign exchange risk characterized by depreciation of the shilling against the United States dollar (USD) is a temporary shock and will soon go away.

“I want to assure Ugandans, this is a temporary shock. We are even likely not to get to June. It is temporary because ours is a free market, and we have a floating exchange rate.”

Ggoobi said this has been occasioned by the issuance of a lucrative Euro Bond (maturing in June 2024) and Infrastructure Bond in Kenya as well as a Euro Bond in Ghana.

He noted that these developments have attracted the portifolio investors depriving the Uganda market.

Ggoobi also said that Uganda has avoided a Euro Bond and the public debt is sustainable, adding that Euro Bonds are very dangerous.

He said Uganda is implementing the fiscal consolidation agenda and hence managing domestic borrowing.

“We shall borrow as long as the cost is reasonable. If the cost is high, we shall not borrow and we shall have to live within our means.” 

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