The Ugandan shilling strengthened marginally on Friday, supported by central bank intervention after it hit a record low against the dollar, but traders said the currency's reprieve could be short-lived.
At 1130 GMT, commercial banks in Kampala quoted the local currency at 2,365/2,370 after the Bank of Uganda (BoU) came in and sold $20 million. Earlier it was quoted sliding to an all-time low of 2,369.50.
The central bank has beefed up the (dollar) supply side and naturally that has calmed things a bit and cooled demand slightly. But what's clear is that the shilling at these levels is still weak and the impact of the central bank's action will not last, said Faisal Bukenya, head of market making at Barclays Bank Uganda.
The shilling has depreciated by 22 percent since hitting a 15-month high of 1,840 on November 18, 2009, Thomson Reuters data showed.
We're trying to smooth out the market. There has been a significant depreciation of the shilling which isn't healthy for the market and we came in this morning to try to slow that and achieve stability, Elliot Mwebya, communications director at the central bank, told Reuters.
The shilling stabilised during the Christmas period on a surge in dollar inflows from Ugandans living abroad, but it has started depreciating again since the start of 2011 due to strong dollar demand, continuing a trend late last year.
In 2009, the shilling benefitted a lot from a big increase in informal exports to south Sudan. In the second half of 2010, it looks like that reversed. We weren't getting much information on informal exports, and from the small information we were getting, you could see it had dropped dramatically from 2009 levels, said Coura Fall, a frontier Africa analyst at Citi in Johannesburg.
Analysts said Uganda appears to be losing its stranglehold over the supply route into war-scarred south Sudan, with Kenyan and South African firms muscling in on the lucrative trade route into the fast-growing region, which looks set to secede from the north in July.
Fall, however, said the shilling was likely to find support at 2,400 to the dollar.
I think we're near the floor, she said.
Bill Page, a partner with Deloitte & Touche, sees the currency recovering over the longer term, saying uncertainty about next month's presidential election is adding to its current weakness.
I think the shilling's problems are in the short term, it's an election season and most likely that's impacting confidence in the local currency but ... I think the long-term prospects for the Ugandan economy are firm and certainly the local currency will recover against the dollar especially as Uganda starts to produce and export its oil, said Page.