The Ugandan shilling weakened marginally on Monday as some banks covered short dollar positions, leaving the local currency down 7.7 percent against the greenback in 2012. "Much of the shilling's depreciation was in the latter part of the year and was largely due to the central bank's moves to loosen its (monetary) policy stance," Faisal Bukenya, head of market making at Barclays Bank Uganda, said.
The central bank hiked its newly introduced central bank lending rate in the second half of 2011 to rein in runaway consumer prices and support the ailing shilling. But the bank has cut its benchmark rate sharply since then as inflation has cooled, and while the rate of price growth picked up again this month to 5.5 percent from 4.9 percent in November, it is far below its 2011 high of more than 30 percent.
At the market close, commercial banks quoted the shilling at 2683/2693 from Friday's close of 2680/2690. Which direction the shilling heads in next year will depend largely on whether the central bank extends this year's monetary easing cycle and on the economic impact of aid freezes slapped on the government in response to graft scandals, Bukenya said.
"On the whole it will be a weaker shilling." Meanwhile economic growth remains a headache for the central bank, which says Uganda's projected growth rate of about 4.3 percent for the 2012/13 (July-June) fiscal year is below the country's potential growth rate of around 7 percent.
That, traders said, means more rate cuts may be in the pipeline. "If the Bank of Uganda remains focussed on economic growth above everything else that would suggest we'll see further loosening and possibly a depreciation trend (for the shilling)," Thaib Lubega, a trader at Stanbic Bank, said. Western donors have cut aid to Uganda over alleged corruption and as a result the government says its planned 2012/2013 public spending will fall short by $260 million.