Martin Luther Oketch
18 December 2011
The Bank of Uganda has doubled its weekly purchase of dollars from commercial banks to $1 million to build the country’s foreign reserves.
For the past one year, BoU has been purchasing 0.5 million dollars weekly, but with the Ugandan shilling weakening, the country needed to increase the amount of dollars in its forex reserves.
Uganda’s foreign exchange reserves fell from about $2.8 billion in 2006, which was enough to cover 6.6 months, to $2.711 billion at end of September 2010, a development that saw the country’s import cover fall to about 5.4 months.
The forex reserves fell between 2006 and 2010 because of the 2008 global economic and financial crisis, which saw many investors preferring to hold dollars instead of other currencies. The shilling weakened and as a result, the BoU was forced to start weekly purchase of 0.5 million from the local market in 2009 to save the country’s foreign exchange levels.
The Executive Director of Research at Bank of Uganda, Dr Adam Mugume, said it was inevitable for the bank to increase the amount of the weekly purchase given that it needs to have a rapid build-up in the country’s foreign exchange cover, which had declined over time.
“The central bank increased the amount of the weekly purchase of foreign exchange in the last weeks to realise a rapid build-up in the foreign exchange buffer to guard against any negative developments that may occur, such as a sharp depreciation of the shilling against the US dollar,” he said.
In the second quarter of 2011, the level of Uganda’s foreign exchange reserve had declined to $1.2 billion — only enough to facilitate 3.9 months of the country’s future imports of goods and services. Uganda keeps all its foreign reserves in US dollars.
Dr Mugume said the increase in the volume of foreign exchange purchase has also been necessitated by the rapid appreciation of the shilling against the dollar in e recent weeks.
The Ugandan shilling appreciated against the dollar from 2,582.18 per US dollar to 2805.37 in early November, before picking up to the current levels in the range of 2,550 to 2,610 per US dollar.
This is due to significant inflows from offshore investors on account of the tight monetary policy stance and inflows from NGOs and coffee exports.
“The weekly purchase by the central bank is to try and smoothen out the volatility in order to create a conducive business environment and restore confidence in the market. Market analysts expect inflows to come in from the diaspora and offshore investor flows looking for a high yield in government securities and this may continue to strengthen the shilling in the medium term,” says Mark Bitarabeho, trade analyst at Standard Chartered.
Dr Muguwe explained that following the increase in the weekly purchase of foreign exchange, the level of Uganda’s foreign exchange reserve cover had increased from $1.2 billion to now $1.4 billion — equivalent to 4.2 months’ worth of the country’s future imports of goods and services. The country now has the highest foreign exchange cover in East Africa.
The need for a healthy international reserve cover was underscored by the International Monetary Fund mission that visited Kampala in October 2011 to discuss the third review under the Policy Support Instrument.
The PSI is an IMF programme designed for countries that do not need balance of payments financial support. It helps them set up economic programmes that, once approved by the IMF’s executive board, signal to donors, multilateral development banks, and markets the fund’s endorsement of a member’s policies.
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