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Ugandan shilling firms against the US Dollar, coffee exports could have helped

The Ugandan shilling strengthened against the dollar on Thursday, lifted by greenback inflows from coffee exporters and low dollar demand from corporate clients as they prepare to pay taxes.

Commercial banks in Kampala quoted the currency of east Africa's third largest economy at 2,473/2,481 to the dollar, compared with 2,470/2,480 earlier in the session and stronger than Wednesday's close of 2,480/90.

"We have seen significant dollar conversions from coffee exporters in the market weighing against slumping demand," said Ahmed Kalule, trader at Bank of Africa.

"Demand is low mainly because companies are saving their shillings for full year tax payments."

Uganda's 2011/12 fiscal year ends this month.

Apart from June 14 when the shilling briefly came under pressure after the government hiked withholding tax on earnings from investments in its securities, the local currency has been oscillating in the 2,470-2,500 range for about three weeks.

Analysts say it will weaken in the medium term as a new policy easing cycle by the central bank starts to filter through the real economy.

Ahmed said the shilling's outlook was also being clouded by the persistent crisis in the euro zone, which is dampening investor appetite for risky frontier market assets.

"In the medium term the shilling will be trading higher (weaker) as the impact of central bank's policy easing cycle unfolds," said Denis Mashanyu, trader at Standard Chartered Bank.

The Bank of Uganda this month cut the benchmark Central Bank Rate (CBR) to 20 percent from 21 percent in May to stimulate sagging economic growth.

Uganda's GDP growth this fiscal year took a hit from an aggressive run of policy tightening in the second half of 2011 and is expected to slow to 3.2 percent from 6.7 percent in 2010/2011.

21 June 2012

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