US Interest Tightening Expected To Weaken Uganda Shilling

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BY BANKERS REPORTER

The US central bank recently announced its biggest interest rate increase in more than two decades in a bid to intensify its fight against inflation. 

The FED (federal reserve) lifted its benchmark interest rate by half a percentage point, to approximately 1%, sending the global economy in panic mode. And this was after a smaller (about 0.25 percentage point) rise in March this year. 

According to Fed chairman Jerome Powell, tightening the benchmark rate would help to arrest the worst inflation the country has seen in 40 years, and reiterated that until it comes down, they would not stop. 

However, the move is said to have grave consequences on emerging economies such as Uganda, as it is likely to hike the cost of government financing, which in turn has implications on the overall economy, as government will need more dollars to pay for its current debt obligations. 

Speaking at the Absa post national budget dialogue at the Kampala Sheraton hotel this week, Stephen Kaboyo, Managing Director, Alpha Capital Partners, said the Fed move will also narrow interest rates locally, because of the interest differential between Uganda, the US and other developed markets. 

This, he said will lead to reversal of capital flows, as the safe haven appeal of the US dollar has obviously increased, leading to a rise in US treasury yields.

As a result, ‘most of the portfolio flows that were coming into our market will find their way back.’

“The US move will definitely continue to weaken the local unit, to an estimated average of sh3,950 at the end of the first quarter of the 2022/23 financial year,” he warned.

Looking at the demand and supply dynamics, Kaboyo said the strength of the dollar, the interest rate differentials and the geopolitical risks, Ugandans have to brace for a weaker shilling and rising inflation in the medium to long term. 

Further, Kaboyo warned that inflation in the medium term is likely to continue increasing, since Uganda is a net importer, in addition to the global crude oil prices that have continued to rise. 

“We shall need more dollars to import the same quantities of oil as we are doing now, which has serious implications, yet we can’t do anything about it,” he said. 

Absa Uganda Managing Director, Mumba Kalifungwa said Uganda like many other economies all over the world is likely to see a lot of capital flight from a dollar perspective, because soon, dollar investors begin to convert their assets in the emerging markets to other frontier markets, where they believe that the dollar is more stable. 

“This will have a negative impact on the exchange rate but we are confident that the central bank is keenly watching that space and a major intervention should soon come through,” he said. 

He added, “It is most likely that the decision of the Fed could have a spiral effect around the global economy because it is the largest economy in the world.”


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