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Ugandan shilling analysis and predictions for 2018

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For most of 2017, the Ugandan shilling has remained within the 3,550 and 3,650 range against the US dollar. On some few days, the Ugandan shilling weakened further to surpass the resistance level at 3,650. On the other hand, it was never strong enough to beat the US dollar and break the support level at 3,550. This data is indicative of the general dour economy in Uganda that has prevailed this year.

Why has the Ugandan shilling been underperforming?

Before the end of 2016, the Ugandan shilling was trading at about 3,400 against the US dollar. However, since the election of President Trump, the currency depreciated by over 6% to reach 3,600. Many other currencies also suffered from the rising value of US assets, and this was predictable. This level proved to be a significant resistance level, which could not be surpassed.

Now, though, even this significant level has been broken through showing that the currency is depreciating. The Ugandan economy has had a lot to do with this depreciation in currency, and it is worth analyzing the country’s economy first.

About the Ugandan economy performance

The financial year in Uganda begins in April each year, with the first quarter ending in June. For the first quarter of the 2017 fiscal year in Uganda, the country’s economy actually performed well. The GDP growth rate expanded by 1.8%, higher than the 1.4% growth recorded in the final quarter of the 2016/17 fiscal year. For the entire year 2016, growth was quite slower at 4.8% compared to 5.5% growth recorded in 2015.

Despite the drop, the African Development Bank (AfDB) predicted that the economy would rebind, predicting 5.1% growth in 2017 and 5.8% growth in 2018. One of the reasons for the slowed GDP growth in the 2016/17 fiscal year was rising inflation. Severe drought in the country had caused a gradual increase in food prices due to poor crop harvest. For a country that is largely dependent on agriculture, the drought was a huge blow to the economy.

As such, inflation in the last quarter of the 2016/17 fiscal year kept rising. In January, inflation was at 5.9%, then it rose to 6.7% in February and 6.4% in March. At the start of the 2017 financial year, inflation again rebounded to 6.8% and consequently to 7.2% in May. Since then, though, the rate of inflation has been steadily declining.

After GDP reports of the first quarter performance, the predictions by the AfDB seemed to be on track. Despite the challenges to the economy in terms of inflation and political instability, the country was starting to show promise through stabilizing inflation and reduce government spending.

How the Ugandan shilling performed in 2017

The Ugandan shilling also responded positively to the news on faster GDP growth by appreciating against the dollar. It was only a minor appreciation, which could be argued was fuelled by the US dollar’s own weakness, but it was still hope for the currency. Another factor that had also contributed to the decline of the Ugandan shilling was the large domestic arrears. In the 2016 financial year, the Ugandan government had spent a lot of money in various programmes. According to the IMF, these domestic arrears had reached $741.8 million, a 94% increase from the previous financial year. The government had paid out pensions while court awards and rising interest costs also contributed. These domestic arrears have since been reduced gradually, strengthening the economy even further.

Forecast for 2018

So far, the signs are positive for a stronger Ugandan shilling in 2018, although there may be some decline in the coming months. Some experts have called to the increasing imports by Ugandan businesses that might pressure the currency to depreciate further. However, these declines may only be short-lived, since the imports are only accelerating toward the end of the year.

Overall, the economic outlook and currency strength for the entire year remain positive. Even PricewaterhouseCoopers has also affirmed this position along with the Bank of Uganda. The amount of appreciation is still in question, but there is no doubt this currency is on the up and up.

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