KAMPALA: The Ugandan Shilling (UGX) showed notable resilience in April 2024, trading at an average mid-rate of UGX 3,822.7/USD, a significant improvement from UGX 3,895.8/USD in March. This 1.9 percent appreciation marks a welcome change from the depreciation pressures experienced since August 2023, as detailed in the Ministry of Finance’s April 2024 Economic Performance Report.
Factors Driving Shilling Appreciation
The strengthening of the Ugandan Shilling was underpinned by multiple factors, with a significant influx of foreign currency being paramount. Increased offshore investments in Uganda’s government securities played a critical role. “The competitive yields on government securities, driven by the Central Bank’s monetary policy actions, attracted substantial foreign investments,” stated an analyst at the Ministry of Finance.
In March 2024, the Bank of Uganda raised the Central Bank Rate (CBR) to 10.25 percent, further enhancing the appeal of Ugandan government securities. Additionally, heightened dollar inflows from higher export receipts, particularly from coffee, bolstered the Shilling. Foreign Direct Investments (FDI), private remittances, and contributions from non-financial institutions like Total Energies also contributed to the currency’s strength.
Interest Rate Movements and Lending Dynamics
The monetary policy tightening by the Bank of Uganda, evidenced by the CBR hike, aimed at curbing inflationary pressures. Despite this, lending rates for Shilling-denominated credit decreased to 17.34 percent in March 2024 from 18.09% in February 2024. “Banks are lending more to prime corporate borrowers, who are considered lower risk, leading to a reduction in average lending rates,” explained a senior banking official.
Conversely, lending rates for foreign currency-denominated credit rose to 9.2 percent in March from 8.8 percent in February. This increase was primarily due to previous months’ depreciation pressures on the exchange rates, highlighting the complex interplay between currency valuation and lending dynamics.
Government Securities and Market Demand
In April 2024, the Ugandan government raised UGX 1,163.64 billion through Treasury Bill and Bond auctions. Of this, UGX 441.13 billion came from T-Bills, and UGX 722.51 billion from T-Bonds. The majority of these funds, UGX 491.53 billion, were allocated towards refinancing maturing treasury instruments, while UGX 672.11 billion was directed towards other budgetary needs.
The tightening monetary policy led to a slight increase in the annualized yields on Treasury Bills. For instance, the 364-day and 182-day tenors saw yields rise to 13.4% and 12.6 percent, respectively, compared to the previous month’s figures. The 91-day tenor yield remained stable at 9.8%. Notably, all Treasury Bill auctions were oversubscribed, with an average bid-to-cover ratio of 2.06, indicating high demand for government securities.
Yield Trends on Treasury Bonds
April also saw the issuance of two Treasury Bonds: a 2-year and a 10-year tenor. The yields for these bonds increased slightly, reflecting investor sentiment and the Central Bank’s policy stance. The 10-year bond yield rose to 16.00 percent from 15.80 percent in the February 2024 issuance, while the 2-year bond yield increased to 13.75 percent from 13.20 percent in January 2024.
Conclusion
The appreciation of the Ugandan Shilling in April 2024 is a multifaceted phenomenon driven by increased foreign investments in government securities, robust export receipts, and strategic monetary policy actions. As the Central Bank continues to navigate inflationary pressures and lending dynamics, the currency’s performance remains a critical indicator of Uganda’s economic health. “The Shilling’s strength is a testament to the resilience of Uganda’s economy amidst global financial fluctuations,” remarked a financial expert from the Bank of Uganda.
