Why Ugandan shilling is the strongest currency in East Africa

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Kampala, Uganda | By Michael Wandati | In the closing months of 2023, the Uganda Shilling exhibited resilience, achieving stability against the US Dollar and outperforming its counterparts within the East African Community (EAC), as highlighted by analysts.

The currency demonstrated a fluctuation range between 3,767 and 3,815 against the US dollar over the past month, with the Bank of Uganda reporting a midday rate of 3,803 on Monday.

The Shilling experienced a steady ascent against the dollar throughout the preceding year until August, when the World Bank’s decision to suspend new loans to Uganda, citing concerns over the Anti-Homosexuality Act, triggered a brief depreciation.

Michael Atingi-Ego, Deputy Governor of the Bank of Uganda, noted a decline from approximately 3,650 to nearly 3,750 within two days.

While this setback was initially challenging, the impact has been overcome, and the Shilling remains relatively stable, despite intermittent depreciation pressures in the quarter leading up to November 2023.

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The December State of the Economy report from the Bank of Uganda indicates that, despite a 2 per cent depreciation during this period, the Shilling was still 1.2 per cent stronger compared to the same period in 2022.

Corporate demand, particularly from the oil, telecommunications, and manufacturing sectors, coupled with portfolio capital outflows, contributed to the losses sustained by the Shilling during the quarter. The concerns surrounding the Airtel Initial Public Offering (IPO) also influenced bearish sentiments.

In contrast, other East African currencies experienced more significant depreciation against the US dollar during the same period. The Rwandan Franc and Kenyan Shilling, for instance, depreciated by 4.6 per cent and 5.4 per cent, respectively, in the quarter to November 2023, continuing a depreciation trend observed over the past few years.

Kenya’s currency faced additional challenges due to fuel subsidies and political uncertainties leading up to the August 2022 presidential elections, resulting in a loss of over 48 per cent of its value to the US dollar. Meanwhile, the Uganda Shilling only suffered a 3 per cent loss.

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Recent data from the Central Bank of Kenya indicates a gradual easing of pressure on the Kenyan Shilling, with a slower pace of weakening as demand for the dollar decreases. The Tanzanian Shilling also experienced a 4.8 per cent loss to the dollar in the three months to November 2023.

Despite nominal depreciation, the Uganda Shilling remained relatively stable in real effective terms, appreciating against a basket of trading partners’ currencies by 4.2 per cent compared to the same quarter the previous year. This strength was further supported by a decrease in import prices.

Factors contributing to the dominance of the Uganda Shilling in East Africa

The dominance of the Uganda Shilling in East Africa can be attributed to several key factors. Firstly, Uganda has maintained a stable macroeconomic environment, characterized by prudent fiscal and monetary policies. This stability fosters investor confidence and attracts foreign investment, contributing to the strength of the Shilling.

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Additionally, Uganda’s diverse and resilient economy plays a role. The country has a robust agricultural sector, a growing services industry, and significant natural resource wealth, including oil discoveries. These economic fundamentals provide a foundation for the stability and strength of the Uganda Shilling in East Africa.

The prudent management of the Shilling by the Bank of Uganda is crucial. The central bank’s commitment to maintaining a flexible exchange rate regime, intervening when necessary, and implementing effective monetary policies contributes to the Shilling’s resilience against external shocks.

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Furthermore, Uganda’s relative political stability compared to some of its East African neighbors enhances the confidence of investors and businesses, positively impacting the value of the Shilling. Political stability is often a key consideration for foreign investors, and Uganda’s relatively peaceful environment contributes to the attractiveness of its currency.

Trade dynamics also play a role in the dominance of the Uganda Shilling. The country has fostered regional trade ties and economic partnerships, contributing to a favorable balance of payments. This, coupled with efforts to reduce trade imbalances, supports the Shilling’s strength within the East African region.

Lastly, the prudent management of external debt has been instrumental. Uganda has been cautious in accumulating external debt, ensuring that its debt sustainability remains manageable. This approach instills confidence among investors and creditors, positively influencing the Shilling’s standing in the region.