Despite economic challenges internally and globally, the Uganda
shilling registered improved performance. Bank of Uganda says on
average, the shilling depreciated by 0.38 per cent in 2020 compared to
an appreciation of 0.6 per cent in 2019.
Exchange rate changes between currencies influence the behaviour of several macroeconomic variables over a varying time horizon.
Currency
depreciation, for example, can be expected to affect the demand for
money, aggregate demand, and the levels of prices and output, as well as
to induce external and internal relative price shifts that alter the
composition of the expenditure.
The executive director of research
Bank of Uganda, Dr Adam Mugume told Daily Monitor on January 4 that the
shilling has largely been stable in 2020 despite the Covid-19 pandemic
that affected foreign exchange inflows, especially the tourism receipts.
“The
relative stability is partly a reflection of subdued aggregate
demand. The shilling depreciated by 3 per cent between February and May
2020 but appreciated by 3.3 per cent between May and December 2020,” he
said.
“This reflects the effects of measures both domestic and global
taken to mitigate the Covid-19 spread. On average, the shilling
depreciated by 0.38 per cent in 2020 compared to an appreciation of 0.6
per cent in 2019,” Dr Mugume added.
In an era when countries are
becoming increasingly linked to one another through trade and capital
flows, the functioning of a country’s exchange rate regime is a critical
factor in economic policymaking.
Currency policy in most African
countries is characterised as being a flexible currency regime in nature
without pegging the currency rate against the US dollars.
Explaining
how currencies in the region performed, Dr Mugume said in 2020, the
Kenya shilling depreciated by 9.4 per cent, Rwanda Franc by 5 per cent,
South Africa Rand by 3.6 per cent, Tanzania shilling by 0.41 per cent.
“On a trade-weighted basis, (Nominal Effective Exchange Rate) appreciated by 0.5 per cent year-on-year,” he said.
Outlook
With
gradual economic recovery gaining momentum in Uganda, there are hopes
that the Uganda currency is likely to remain stable in 2021.
Giving
insights on the future of the shilling in the first quarter of 2021, Dr
Mugume said: “Going forward, the exchange rate is likely to remain
stable on account of matched corporate activity; with a bias towards a
mild depreciation due to Covid-19-related market uncertainty.”
“Dr Mugume added: “However, in 2021 and beyond, the shilling could
benefit from a projected USD depreciation against other reserve
currencies. Moreover, the outlook for a post-pandemic rebound in global
growth and trade in 2021 and the reduced odds of unpredictable trade
wars should lead to a reduction in exchange rate volatility.”
The
general election in Uganda is happening mid this month with presidential
and parliamentary election scheduled for January 14.
Asked
whether the forthcoming general election will affect the shilling, Dr
Mugume said the uncertainty impact on the exchange rate induced by
elections should have had an impact by now.
“We are continuing to see
exchange rate appreciation and offshore investors have increased their
investments by about $140 million in two months to December 2020,” he
said.
editorial@ug.nationmedia.com
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