What explains depreciation of Uganda shilling, other EAC currencies

by Christopher Kiiza
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During October 2023, there was a general depreciation of all currencies within the East African Community (EAC) Partner States, against the US dollar.

The Rwandan Francs and Kenyan Shilling had the highest depreciation rates at 1.82% and 1.81%, respectively.

The Tanzanian shilling, Ugandan shilling, and Burundian Francs also registered depreciation rates of 0.74%, 0.5%, and 0.16% respectively.

The depreciation of EAC currencies, according to the Ministry of Finance, was caused by the global strengthening of the dollar and higher portfolio outflows ensued by better rates in advanced economies.

The monthly average rate for the Uganda shilling was recorded at Shs 3,755.63/USD up from Shs 3,738.02/USD in September 2023.

“This was attributed to higher portfolio outflows due to better rates in advanced economies, increased debt service obligations, and global strengthening of the US Dollar,” the Ministry of Finance’s latest report reads.

However, when compared to the same month last year, the Uganda shilling appreciated by 1.7% from a monthly average rate of Shs 3,822.3/USD to Shs 3,755.6/USD. This appreciation was mainly due to increased coffee export receipts, higher foreign investments particularly in the oil sector and increased inflows of grants and personal transfers.

During October 2023, the Uganda Shilling gained value against the Euro and Pound Sterling, posting appreciation rates of 0.7% and 1.4%, respectively.

On matters interest rates, Bank of Uganda maintained its policy rate at 9.5% in October 2023, for the third consecutive month. This was in response to a reduction in inflationary pressures reflected by a decline in annual headline inflation from 2.7% in September 2023 to 2.4% in October 2023.

Annual inflation has been declining since February 2023, thereby contributing to the low inflation outlook, which influences the decision of setting the monetary policy rate by the Central Bank.

Uganda has the lowest inflation among East African countries, although other countries such as Tanzania and Rwanda are not doing bad.

With the exception of Kenya, annual headline inflation among all EAC Partner States is on a declining trend.

Uganda, Tanzania and Rwanda’s inflation reduced to 2.4%, 3.2% and 12.9% in October 2023, compared to 2.7%, 3.3% and 18.4%, respectively in September, 2023.

The slowdown in price increases in Tanzania was due to lower prices for some food items such as wheat, soghurm flour, millet grains, maize grains, fresh fish, among others.

In Rwanda, lower prices for food and non-alcoholic beverages explained the decline in inflation.

On the other hand, annual headline inflation in Kenya rose to 6.9% from 6.8% the previous month, largely due to higher fuel prices which fed into higher transport costs and also drove up the cost of some food items.

Lending Rates in Uganda

In September, 2023 the weighted average commercial bank lending rate increased to 18.95% compared to 18.40% recorded for the previous month.

In addition, the lending rate for foreign currency denominated credit also increased to 9.00% in September 2023, compared to 8.57% the previous month.

“This was partly due to the rise in the risk averseness of commercial banks following the rise in the provisioning for bad debts during the period under review,” reads the October performance report by the Ministry of Finance.

Meanwhile, concerning the private sector credit, the stock of total outstanding private sector credit grew by 1.6% to Shs. 21,167.96 billion in September 2023 from Shs 20,841.38 billion in August 2023, with increases recorded for both shillings and foreign currency denominated credit.

Shillings and foreign currency denominated credit rose to Shs 14,871.8 billion and Shs 6,296.1 billion in September 2023 from Shs 14,771.8 billion and Shs 6,069.5 billion, respectively in August 2023.

This was in part due to the continued improvement in economic activity and positive sentiments about business conditions.

Credit Extensions

The value of credit approved for disbursement in September 2023 amounted to Shs 1,090.3 billion, a Shs 3.1 billion increase from Shs 1,087.2 billion the previous month.

This represents an approval rate of 53.4% in comparison to the rate of 64.7% in August 2023, partly due to higher risk averseness by commercial banks following the rise in provisioning for bad debts.

In September 2023, personal and household loans accounted for the largest share of credit approved at 30.4% (Shs 331.3 billion).

Other notable recipients of credit included Trade at Shs. 224.4 billion (20.6%), building, mortgage, construction and real estate at Shs. 165.8 billion (15.2%), business, community, social and other services at Shs 147.6 billion (13.5%), and agriculture at Shs. 115.8 billion (10.6%).

These five sectors constituted 90.3% of all the credit extended to the private sector during the month.

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