Uganda, Kenya rate paths to diverge on currency moves

East African markets have been witnessing contrasting trends in recent months, with the Ugandan shilling holding steady while the Kenyan shilling has appreciated significantly. The Central Bank of Uganda recently maintained its benchmark rate at 10.25 per cent, indicating stability in the market. On the other hand, the Kenyan shilling has seen a remarkable appreciation of almost 10 per cent since August, driven by factors such as the partial refinancing of its June 2024 dollar bonds and a recent $1.2 billion loan approval from the World Bank. Phillip Ssali, Head of Corporate Sales & Global Markets at Standard Bank Group, provided insightful commentary on the state of these East African markets and the potential implications of recent economic developments. Key Theme: The key theme revolves around the contrasting paths taken by Uganda and Kenya in response to evolving economic conditions. While Uganda focuses on maintaining stability and exploring alternative financing sources, Kenya benefits from significant international funding and debt sustainability measures, potentially stimulating private sector growth. Key Points: 1. Uganda's Access to Credit: With a potential decline in external concessional funding, Uganda may need to seek alternative sources of financing. This could involve increasing domestic revenue mobilization, seeking bilateral lenders, and considering domestic borrowing as short-term solutions. The government's cooperation with the World Bank on approved projects is crucial for securing additional concessional financing and supporting the country's economic development. 2. Strategies to Stimulate Private Sector in Uganda: Despite maintaining the lending rate at 10.25 per cent, Uganda seeks to stimulate private sector growth through various strategies. These include reducing the cost of doing business, improving infrastructure, lowering energy costs, providing incentives for key industries like agriculture, and offering tax holidays to attract investors and drive business expansion. 3. Impact of World Bank Financing in Kenya: The recent approval of a $1.2 billion financing package from the World Bank is expected to benefit Kenya's economy significantly. The funds are likely to be used to pay off maturing euro bonds, reducing the need to dip into reserves and supporting debt sustainability. This positive development not only eases the pressure on domestic borrowing but also opens doors for bilateral financing at concessional rates, potentially lowering the cost of credit for the private sector and promoting overall economic growth. Quote: According to Phillip Ssali, "The 1.2 billion World Bank financing that was approved last week, we largely expect that to be used to pay off the principal of the euro bond that's maturing in June 2022. It's a positive development for the country, above and beyond that, there's no need for a country to dip into its reserves to pay off that euro bond. It's a positive for debt sustainability, in terms of the cost of borrowing for the Kenyan government overall." In conclusion, the differing approaches taken by Uganda and Kenya reflect unique economic challenges and opportunities in the region's markets, shaping their currency trajectories and long-term growth prospects.