The State of the Ugandan Shilling

Monday, July 25, 2011
By ugandansabroad

By Peter Muzoora
New York (Ugandans Abroad) — Uganda has seen an unprecedented rise in protests triggered by the cost of living back home, and the dire condition of the shilling.  Traders and others in the business community recently closed shop to protest the high fuel prices and a weak shilling, which yesterday was valued at sh2605 to one dollar, and has dropped as low as sh2700.
Despite recent Central Bank interventions, the shilling has been at some of its lowest levels against the dollar.  There has been a 15.8 percent inflationary spike in Uganda, and regionally, Kenya has seen inflation at 14.5 percent. Tanzania is facing 10 percent inflation, while only Rwanda has kept inflation in single digits at 6 percent.

Marie Kiwanuka, the minister of finance and economic development in Uganda. Photograph by Edward Echwalu.

Regionally, consumers are hurting back home as their savings and salaries shrink in purchasing power.  Bloomberg, a financial news agency, recently named the Ugandan shilling as one of the worst performing currencies in the world, as it has slid a sharp 12 percent since January.

The Kampala City Traders’ Association held a two-day strike and called on the government to fix the exchange rate at sh2000.  The government said this would violate the country’s open market dynamics, and require the government to subsidize traders by about sh500 per dollar, still harming consumers.
Maria Kiwanuka, the minister of finance and economic development, told Parliament that there are only mid to long-term solutions to the structural imbalance.  Much of this, she said, depends on the recovery of global export markets, as well as the rate of recovery by advanced economies to current financial crises.
Despite this, the Bank of Uganda launched a program called Inflation Targeting on July 5th, which will use a Central Bank Rate (CBR) or interest rate, to guide seven-day interbank interest rates.  The rate will be set once a month and publicly announced to clearly announce the government’s stance on monetary policy during the month, according to Dr. Louis Kasekende, the deputy governor of Bank of Uganda.

The Bank of Uganda is struggling to stabilize the shilling.

The CBR will be set at a level which is consistent with moving core inflation towards the Bank of Uganda’s policy target of 5 percent over the medium term, down from its 17-year high of 16 percent in May.   It is similar to the London Interbank Offered Rate(LIBOR), adopted in the mid 1980’s by the world banking system as a much needed benchmark for short term interbank loans, which are fixed every business day in the UK.

The CBR is seen as a welcome sign for an economy facing inflationary pressures, a volatile exchange rate, rising interest rates and increased friction between the private sector and the government.
Peter Muzoora is an accounting student at Baruch College and a contributing writer based in New York. He can be contacted at petermuzoora@gmail.com.

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3 Responses to “The State of the Ugandan Shilling”

  1. Thanks for keeping us in the loop, Peter! What’s ahead this week for the shilling? Have you shared your story yet with Talib and 50?

    #65901
  2. Arao

    Peter, great piece…very straight forward & concise!

    #65905
  3. Props, good piece for anyone who follows east african finance.

    #65956

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