The strength of the dollar withstanding, there are a number of the factors that indicate the Uganda shilling may depreciate further. The guest speaker at the very conference Prof Balunywa (also a former Bank of Uganda board member) intimated the depreciation may reach UGX 3500 to the dollar by June next year. First the exchange rate has been on a downward spiral over the last decade, in particular depreciating from UGX/USD 1750 in January 2007 to a record low of UGX 3000 in March 2015, and has since oscillated around that bound even with the Central bank intervention.
In 2011, there was a heightened depreciation of the shilling, in part on account of the election related fiscal slippages and increased money supply. It is projected that money supply will grow at higher rate of 17.5% in both FY 2014/15 and 2015/16 compared to 6.7% in FY 2012/13. On account that the recent supplementary budget was largely recurrent, and funded in part by re allocations, it is arguable that the recurrent budget will account for more than 50% of the budget and a similar trend could be exhibited with the expansionary 2015/16 budget, as was in previous election years.
There is bi causality between the exchange rate and the current account (difference largely between exports and imports) - implying the shilling depreciation would spur more exports and reduce imports on account of relative respective prices. On the other hand, the widening current account deficit would have a weakening effect on the shilling. While the statistics show that Ugandan current account deficit has eased, it remains a sizeable share of GDP and susceptible to worsen, which leaves exchange rate vulnerable. The export basket remains narrow and is dominated by primary products, including coffee, fish, tobacco, gold, and flowers. The dismal growth in the Eurozone, suspension of vegetables to the Europe, conflict in South Sudan and Burundi should have a fair share impact on foreign exchange earnings through exports and remittances as well as aid transfers. The import bill will likely increase on account of the large import bill associated with large infrastructure projects.
There are a number of other factors inter alia, the increased visa fees impact on tourism, the envisaged slowdown in foreign direct investments due to the dwindling oil prices; election downward risks, and the US recovery. The periphery bound foreign exchange reserves will arguably compromise the credibility of central bank to stabilise the rate against volatility.
By and large, the increased dollarization of economy, with foreign deposits at UGX 4.578 trillion in March 2015 accounting for 36% of the total deposits from 33% in June 2014, is indicative of the increased preference of the dollar by key economic players. Against the backdrop of factors highlighted, taking a short position in dollar may be potentially lucrative. Given the exchange rate follows a random (volatile) walk; take my conclusion with a pinch of salt.
By Enock Nyorekwa Twinoburyo
PhD Research Fellow at University of South Africa