The Uganda shilling remained under pressure against the US dollar on Monday, with the Bank of Uganda’s indicative exchange rates putting the dollar’s buying rate at Shs 4,429.76 and selling rate at Shs 4,439.76, as debate grows over how to contain the currency’s depreciation.
The latest rates come as the central bank prepares to auction Shs 1.4 trillion in Treasury bonds on Wednesday, October 28, adding another development to watch as policymakers and analysts debate how best to respond to the pressure on the shilling.
A notice issued by the Bank of Uganda shows that the auction will offer 250 billion shillings in two-year bonds, 350 billion in five-year bonds, 450 billion shillings in 15-year bonds and 350 billion shillings in 25-year bonds.
The securities carry coupon rates ranging from 15 to 16 percent. The auction involves reopening existing government securities. Although Treasury bond sales can influence domestic liquidity and interest rates, the notice does not indicate that the operation is specifically intended to stabilise the shilling.
The currency’s weakness has prompted renewed discussion about the extent to which the central bank should intervene in the foreign-exchange market, particularly through the sale of dollars from its reserves.
On October 14, the Bank of Uganda raised its Central Bank Rate by 2.25 percentage points to 12 percent, seeking to contain inflationary pressures amid concerns about the shilling’s depreciation and rising global energy costs.
The bank also returned to the foreign-exchange market to sell dollars on October 22. The latest developments have drawn attention to proposals by Former Uganda Investment Authority Chairman, Morrison Rwakakamba.
He argues that Bank of Uganda can slow the shilling’s depreciation without exhausting its reserves or attempting to force the dollar back to a fixed exchange rate.
In a paper dated October 23 titled Breakdown of THIRD PATH Measures to contain the weakening of Uganda Shilling, Rwakakamba proposes a combination of limited dollar sales, preferential access to foreign currency for essential imports and temporary measures to discourage the hoarding of dollars.
He proposes that the central bank sell no more than 150 million US dollars in October and 250 million dollars in November and December to calm panic buying.
He also recommends that the bank publish weekly figures showing how much it has sold, allowing the public to monitor the effect on foreign-exchange reserves.
Rwakakamba argues that sudden increases in the dollar’s price can trigger panic buying by businesses and individuals seeking to protect themselves against further depreciation, creating additional demand that puts pressure on the shilling.
He further proposes the establishment of a temporary facility offering dollars at a slightly better rate to importers of essential commodities, including fuel, fertiliser, essential medicines and wheat.
Under the proposal, the dollars would return to the market when the imported goods are sold, allowing reserves to support essential imports without becoming a permanent subsidy.
Importers of non-essential goods would continue to obtain foreign currency at the prevailing market rate.
Rwakakamba also proposes making it slightly more expensive to hold dollars for a short period, although the paper’s recommendations would require further clarification on how such a measure would be implemented.
The proposals offer an alternative to relying solely on interest-rate adjustments or allowing the exchange rate to absorb pressure from demand for foreign currency.
The depreciation of the shilling continues to negatively impact business operation involved in the imported fuel, machinery, medicines and raw materials.Continued depreciation raises the shilling cost of settling dollar-denominated payments. The additional costs can feed into transport, production and consumer prices-URN. Give us feedback on this story through our email: kamwokyatimes@gmail.com
