Uganda's central bank said on Wednesday it would adopt a more aggressive stance towards the shilling's exchange rate after the local currency sunk to an all-time low of 2,395/2,400 versus the dollar.
Bank of Uganda intervened on both Tuesday and Wednesday after the Ugandan shilling hit 2,395/2,400 to the dollar. The action helped the local currency rally to its highest level in three days of 2,330/50.
We believe that the current level of the Uganda shilling/dollar exchange rate is undervalued ... further depreciation will be counter-productive for macro-economic management, Governor Emmanuel Tumusiime-Mutebile said.
Open market exchange rates are difficult to control and no central bank can guarantee to move the exchange rate in the direction it wants. However, I want to stress that we are not indifferent to further exchange rate depreciation and that for the immediate future curbing such depreciation will be a priority of the Bank of Uganda's macroeconomic management.
The governor said the central bank was intervening to mitigate the impact a weakening shilling would have on the prices of imported goods and hence consumer price inflation.
Tumusiime-Mutebile said in a statement the BoU was prepared to intervene again if necessary.
We are complementing this by raising interest rates in the interbank market and on repo instruments, he said.
The shilling closed Wednesday's trade at 2,350/60 buoyed by the central bank's dollar sales. BoU did not say by how much it had intervened on both Tuesday and Wednesday. It sold $20 million last Friday.
The central bank intervention has had an impact with the shilling closing at 2,350/60. Though there was some tightness. I don't expect the shilling to rise much further. I see it trading at 2,320/50 level for the next week, said Faisal Bukenya, head of market making at Barclays Bank Uganda.
Tuesday's drop was the fifth record low of 2011. Some analysts said dollar supply has dried up because of political uncertainty ahead of February 18 presidential elections.
Over and above normal importer needs, aid agencies had postponed disbursement of programme funds and corporates were hoarding their greenbacks, analysts said.
The shilling stabilised during the Christmas period on a surge in dollar inflows from Ugandans living abroad, but resumed a weakening trend this year.
Uganda has discovered hundreds of millions of barrels of oil that it hopes to start exploiting in 2012. The massive investment flows needed for that are expected to give the shilling an upper hand in the medium term, analysts say.