The Uganda shilling appreciated against the dollar between 2021 and the beginning of 2022. The shilling began a negative devaluation spiral that has continued to this day from early March 2022. (Why the shilling is losing value)
The shilling had strengthened in the previous year, increasing by 2.3% between April 2021 and April 2022, according to Finance Minister Matia Kasaija, who made the announcement during his speech outlining the budget for the 2022–2023 fiscal year. Kasaija underlined that increased dollar inflows from Uganda’s exports, foreign direct investments, and foreigners purchasing government treasury bills and bonds were all contributing factors to the gain.
In the same address, Kasaija observed that since March 2022, the shilling has been under severe devaluation pressure due to worries about the situation between the Ukraine and Russia, the sanctions that have resulted from it, as well as rising interest rates in industrialized nations.
“The shilling declined by 6.7% versus the US dollar between June 2021 and June 2022, or 1.7% month over month on average, during the three months leading up to June 2022. While the Bank of Uganda is taking the necessary precautions to avoid dramatic changes, currency rate movements are nonetheless occurring.
Early in June 2022, the Bank of Uganda raised its central bank rate, which affects the cost of credit in the market, from 6.5 percent to 7.5 percent in an effort to rein in rising costs for goods and services.
An unidentified senior executive from one of the largest commercial banks in Uganda stated that boosting the central bank rate will just increase the cost of borrowing.
“Accessing the necessary resources to expand our industries is tough due to expensive finance… Since we import more than we export, all of these policies are intended to prevent imported inflation rather than exchange rate fluctuations, which are the largest problem facing the nation, he said.
On the other hand, Alex Kakande, a financial expert and auditor with the accounting firm Ernst and Young, concurred that the strong shilling was a result of the increased export revenue from gold and coffee in 2021 as well as the decreased importation of goods because of the pandemic’s limited demand.
The shilling’s value versus the dollar might have been maintained and Uganda’s dollar reserves may have grown as a result of the higher revenue inflows from gold exports between 2020 and 2021, he continued.
According to estimates, Uganda’s gold exports during that time brought in almost $6 billion. He continued by saying that the activities leading up to the Final Investment Decision (FID) announcement on February 1, 2022, in the oil and gas sector, increased rumors about the advantages of the FID announcement.
The Ugandan shilling continued to gain as a result of this speculation, according to Kakande, which increased the amount of dollars flowing into the country’s economy. Despite the fact that all other currencies in East Africa were declining.
Recent information from the Bank of Uganda indicates that for the final three quarters of the current fiscal year, which concludes at the end of June, the nation has not recorded any gold exports. Kakande thinks the United States of America’s sanction of the African Gold Refinery in March 2022 has contributed to the devaluation of the shilling, despite the fact that Uganda has no recorded gold exports this year.
“Speculation is mostly responsible for financial swings. The market will react favorably if it assumes that one or all scenarios would result in everything being fine. The market couldn’t react to it, he argued, if it didn’t know that gold shipments had been suspended in July 2021.
Kakande predicted that payments for gold shipped in early 2021 could have been received between June and December 2021, which increased the reserves, given the foreign market payment terms average between 120 and 180 days from export to receipt of payments.
According to Kakande, the financial difficulties in the West suggested that Ugandans living abroad could no longer send as much money home as they did a year earlier. According to him, this decreased Uganda’s foreign exchange reserves by lowering the country’s crucial international remittances.
Remittances to Uganda from Ugandans living abroad decreased by 26% from $1.4 billion in 2019 to $1.1 billion in 2020, according to a Migration and Development study from 2021. The Covid-19 epidemic was partially to cause for this.
If we get the FID back, promises from the governments of Tanzania and Uganda, Total, and Cnooc are likely to be a huge boost, which might, in turn, restore confidence, Kakande said in response to the question of whether the shilling could regain strength against the dollar.
More hope for a recovery will be generated by the recent announcement of the over $12 trillion gold discovery in Uganda. Even though it might take a few more months, Kakande projected that these two abundant resources, oil and gold, could provide a significant boost to dollar inflows as well as the much-needed confidence to keep the dollar in check.
Finance Minister Matia Kasaija reaffirmed during his budget speech the government of Uganda’s commitment to the responsible and sustainable development of the nation’s oil and gas resources for the benefit of all Ugandans. (Why the shilling is losing value- CELEBRITY JAZ UG)
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