Bank of Uganda explains weak shilling

The Eurozone debt crisis is the major cause of the turbulent exchange rate, which pushed the shilling to a record low of 2,478 on Tuesday, the Central Bank clarified on Tuesday.

While the US economy is not yet fully on its feet, four major European economies Greece, Portugal, Spain and Ireland are battling a financial meltdown.

Because of this, investors holding assets and other investments in euros are converting them into dollars.

This has caused an unprecedented demand for the dollar, making it more expensive internationally.

Elliot Mwebya, the director of Bank of Uganda's communications department, made the remarks while addressing top executives of the Vision Group during a tour of the company's factory.

He pointed out that the Central Bank does not stifle the forces of demand and supply, but wants to ensure that the spikes are smooth so that there is predictability.

"The movement should be systematic. Our duty is to maintain and boost public confidence and that of offshore investors so that they do not take away their money," Mwebya said.

He added that the bank would continue participating in the market like it did on Tuesday when it injected $40m into the forex market.

Mwebya explained that the high local demand for dollars by oil import companies, manufacturers and multinationals for payment of dividends had not helped the situation.

The demand for oil to run the manufacturing industry and to power the thermal power plants is set to become permanent.

The skyrocketing crude oil prices on the international market and speculators have added pressure on the shilling.

"There is no substantial increase in the dollar supply to suppress the skyrocketing demand. The dollar inflows are not marching the demand," said Edward Tenywa, the head of research and publication.

The shilling yesterday remained under pressure because of high food and fuel prices, weak dollar inflows and the impact of a weaker shilling in neighbouring Kenya, traders said.
The shilling has lost nearly 6% against the dollar this year, mirroring falling currencies in neighbouring economies such as Kenya and Tanzania.

Analysts say the regional units will remain under pressure unless interest rates rise to a level where real returns can attract capital flows into the largely import-dependent economies.

Robert Kabushenga, the Vision Group chief executive officer, asked the bank to deploy staff on radio and television talkshows to explain the new economic developments to the public.

"Sometimes, you need to bring out authoritative figures on such issues of national interest. You have an obligation to the public. You owe them an explanation because they are stakeholders," Kabushenga said.

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