BoU intervention fails to stop depreciating Shilling

Kampala- The Uganda Shilling depreciated touching a record low of 2,895/2,905 despite the Central Bank’s intervention in an effort to stem the trend.

Bank of Uganda director for research Adam Mugume said: “A total of $80 million (about Shs232 billion) was injected into the market in the first two weeks of January.”

He, however, added: “The intervention was basically to control the level volatility and not to control the depreciation.”
Analysts, however, say robust demand from telecommunications, manufacturing, oil and energy firms, coupled with offshore names exiting local assets, has far outstripped supply, leading the market prices to move up.

Standard Chartered Bank head of financial market James Mutuku said: “The Shilling has so far dropped just about 4 per cent in 2015 and looks set to remain weak as the year progresses”.
“The Central Bank announced last week their interest to ensure orderly price movements in the market and we expect them to take measures to achieve that,” Mr Mutuku added.

Forecast
Experts predict the US dollar-Uganda shilling to trade in the 2870-2915 range in the coming week with the possibility of appreciating in the medium term.

Looking at other currencies, the Kenya shilling registered a slight depreciation closing 91.50/60 from the previous close of 91.15/25 last week.
At the monetary policy committee meeting, the Central Bank Rate was held at 8.50 per cent, with the Banks Reference Rate KEBRR (for pricing commercial loans) set at 8.54 per cent from 9.13 per cent.

EFFECT OF FALLING OLI PRICES

With Uganda’s economy mainly dependent on imports, the Shilling depreciation means traders are now spending more to buy the dollars thus making the cost of doing business high.

However, experts believe dropping international oil prices will see Uganda’s oil import bill declining.

“Uganda spends on average $100-125 million (about Shs365 billion) per month on oil related imports; this could decline by 50 per cent in the coming months, which would give boost to trade balance,” Dr Mugume observed.

Furthermore, since oil is an input in several economic activities such as transportation, this would result in lowering of input costs to the production process.
On the negative side, however, Uganda is a prospecting producer of oil and therefore this could derail the investment prospects in the oil sector.

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