Uganda’s central bank governor said it was not sustainable to continue supporting the currency and maintain it at a level not reflective of its market value and that depreciation was “unavoidable” because of weak exports.
The east African country’s currency has been hammered by depreciation pressures since January and has fallen about 16 percent against the dollar.
Much of the pressure has been fuelled by strong demand from importers and foreign-owned firms paying dividends.
Investor sentiment has been further rattled by a widening current account deficit and fears over rampant government spending ahead of presidential elections next year.
In a speech delivered at a meeting of manufacturers on Thursday and seen by Reuters on Friday, Governor Emmanuel Tumusiime-Mutebile said Uganda’s exports were sagging because of a war in South Sudan and lower global commodity prices.
“In the face of the worsening external economic environment …, exchange rate depreciation is unavoidable,” Tumusiime-Mutebile said.
“It is not sustainable for the Bank of Uganda to try and prop up the exchange rate, at levels which are not consistent with supply and demand in the foreign exchange market.”
The central bank has pumped dollars into the market at least 11 times this year to try to stem the depreciation of the shilling although the impact has often been fleeting.
The governor said that if the central bank continued selling dollars to keep the shilling artificially strong, it would “simply deplete its foreign exchange reserves”.
Uganda’s foreign reserves stand at about three billion US dollars, equivalent to four months of import cover, according to finance ministry statistics.
Its trade deficit accelerated to 12.1 per cent of GDP in the 2014/15 (July-June) fiscal year from 10.2 percent the previous year, he said.
The governor attributed the surge partly to government spending on imports for infrastructure development.
Tumusiime-Mutebile said the shilling’s depreciation could help make Uganda’s goods and services cheaper and competitive in the region.
A weaker shilling might also be helpful, he said, by “encouraging Ugandans to purchase domestically produced goods rather than imports”.