Currency Trends in the Third Quarter of 2023
In July 2023, the shilling started at levels of 3665/3675. Throughout the third quarter, it weakened to reach lows of 3765/3775. This drop was primarily due to increased demand for dollars, triggered by concerns over the Anti Homosexuality Act legislation and the World Bank’s decision to withhold new funding from Uganda. Strong dollar demand overshadowed inflows from NGOs and remittances. Additionally, businesses stocked up on merchandise in anticipation of higher consumer demand at the year’s end.
Closing Q3 with a Weaker Shilling
As the third quarter came to a close, the shilling stood at 3755/3765, representing a depreciation of approximately 2.45% from its opening levels of 3665/3675.
Impact on People and Businesses
A weakened shilling means that individuals and businesses buying dollars need more shillings to make their purchases. This increase in costs can lead to higher prices for goods and services. Furthermore, global crude oil prices, exceeding $90 a barrel, have raised fuel costs, affecting transportation expenses. However, those selling dollars benefit from the weaker shilling as they receive more shillings in return.
Expectations for the Final Quarter
The currency is expected to remain volatile in the last few months of the year. While remittances and diaspora flows may increase, continued corporate demand is likely to keep the shilling within the range of 3600 to 3800.
Regulatory and Monetary Policy Developments
In August 2023, the Monetary Policy Committee lowered the Central Bank Rate (CBR) from 10.00% to 9.50% and reduced the Cash Reserve Requirement to 9.50% from 10.00%. These measures aimed to stimulate economic activity by reducing the cost of credit. The reduction in CBR rates has slightly lowered short-term Money Market yields, although this effect has not yet fully impacted lending rates due to a lag effect. Government securities yields also remain relatively high.