As Uganda comes to terms with the suspension by the World Bank of any future lending to the country over its recent passing of the Anti-Homosexuality Act (AHA) and what that could mean to a number of Bank-funded infrastructure and social service projects, another victim of the expected international pushback is the country’s currency- the Uganda Shilling.
The Shilling which has, unlike its regional peers been resilient against the US dollar for much of 2023, opening the week at a strong UGX3600 on Wednesday 09th 2023 lost more than UGX40 in a single day’s trading, closing at an average of UGX3640.
This sharp drop, according to Stephen Kaboyo, the Managing Director, of Alpha Capital Partners, has been “unseen in months”.
“In what I would term as the announcement effect, it caught the market off guard. Markets are always sensitive to negative news and it is likely that the shilling will continue to test new lows,” Kaboyo told CEO East Africa Magazine in an online interview today.
Alpha Capital Partners is an indigenous Ugandan firm focusing on sovereign asset management, foreign exchange trading strategies and financial markets advisory. Before joining Alpha Capital Partners, Mr. Kaboyo was the Director of Financial Markets at Bank of Uganda.
According to the Bank of Uganda (Uganda’s Central Bank) website, the AHA and the World Bank continued their chokehold on the Shilling through to today with the USD today opening at UGX3,613.92 (buying) and UGX3,623.92 (selling). By midday, it had touched UGX3,712 (buying) and UGX3,722 selling, closing at UGX3,725.08 (buying) and UGX3,735.08 (selling).
According to Kaboyo, the USD traded for UGX3750 at some point in the day.
A hard-to-fill financing gap and upheaval in government finances
The World Bank, following the enactment of the anti-homosexuality law, deployed a team to Uganda to review its portfolio in the context of the new legislation, which review determined that additional measures were necessary to ensure projects are implemented in alignment with the Bank’s environmental and social standards that include the protection of sexual and gender minorities from discrimination and exclusion in the projects financed by the Bank. The Bank further said that these measures were currently under discussion with the authorities.
“No new public financing to Uganda will be presented to our Board of Executive Directors until the efficacy of the additional measures has been tested,” the Bank announced.
Kaboyo, said that Uganda has been able to in the past, “maintain good relations with multilateral development partners for a long time”.
“As a result the World Bank portfolio was relatively large compared to our peers. The World Bank funding is concessional with generous terms, such as below-market interest rates, long grace periods and maturity compared to market loans. The disruption will cause upheaval in the government finances. The main concern in the future is that other multi-laterals may follow suit and this will have a huge impact on government funding in key sectors of the economy,” Kaboyo added.
He further said that “it is likely to be a tall order to fill the financing gap left behind especially when we consider that the counter-cyclical lending from the World Bank has been helpful in positioning the economy to withstand shocks, policy support and conditionalities, supporting macro economic reforms, all aimed at promoting economic development”.
Relatedly, Charles Katongole, the Head of Finance Markets at Standard Chartered Bank Uganda also warned of possibly bigger ramifications should other lenders follow suit.
Speaking today at a joint Standard Chartered Bank- Uganda Investment Authority H2 2023 Investor Summit Katongole.
If the World Bank action started “snowballing”, it would have a “real impact on us as an economy”.
Katongole said that prior to the World Bank announcement, the Shilling was beating all earlier projections including sailing strongly through a usually tough first half of the year that is characterised by low tourism receipts, end of the exports seasons, payments of dividends, all of which have a depreciating effect on the local currency.
“We thought before yesterday’s development that give or take, the Shilling would close the year at about UGX3700. Definitely, that’s going to be revised. Just yesterday alone, we lost UGX40, so we need to watch that forecast,” he told the Summit.
He also said that the World Bank announcement comes at a delicate time when the world economy growth prospects are fragile and inflationary pressures in the Western markets have led Western central banks to increase interest rates which are, in turn, causing offshore investors to withdraw the much-needed dollars from the market, back to their home markets, putting forex reserves under pressure. This he said leads to other negative effects such as inflation as well as reduced credit appetite and lower sovereign credit ratings.
According to a report from the Bank of Uganda, gross national forex reserves at the end of December 2022 were at a two-year low of USD3.563 billion, an equivalent of 3.7 months’ worth of imports. This is a 2-year low since March 2020. However by June 2023, this had recovered to USD4.074 billion, but still lower than the all-time high of USD4.463 billion (4.8 months of imports) reached in March 2022.