East Africa currency watch: Can Uganda sustain the strength of its shilling?

Uganda's shilling has defied the odds, emerging as the strongest currency in the East African Community (EAC) amidst economic turmoil in neighboring countries like Kenya. According to the Ugandan finance ministry's May 2024 report, the shilling has appreciated by 0.8 per cent year-to-date and further strengthened by 0.5 per cent against the dollar. Chad Nyakatura, Money Market Sales Manager at Stanbic Bank, Uganda, joined CNBC Africa to analyze the factors behind this economic anomaly. Kenya, Uganda's neighboring nation, has been grappling with devalued currency and inflationary pressures leading to a rise in policy rates to 13 per cent. This increase has escalated the general cost of debt and doing business, resulting in high Non-Performing Loans (NPLs) at around 15 to 16 per cent. The recent introduction of a new tax bill in Kenya has sparked protests as the government aims to boost tax revenue to 346 billion Kenyan shillings. Chad expressed hope for stability and quick resolution in Kenya to mitigate the negative impacts of the ongoing situation. In contrast, Uganda's shilling performance has been bolstered by increased supply surpassing demand, driven by higher coffee inflows and international price hikes. The currency's appreciation in June and July aligns with coffee exporters' inflows and firms accumulating cash reserves for tax payments. Despite the expected range-bound trading of the shilling, Chad highlighted potential currency volatility influenced by global monetary policy decisions and geopolitical tensions impacting emerging market currencies. Moreover, Uganda has witnessed a surplus of dollar supply as both local and foreign entities have become net sellers of dollars in the market. This trend distinguishes Uganda from its regional counterparts like Rwanda and Tanzania, where currency values confront pressure due to liquidity constraints. Notably, the Ugandan shilling continues to outperform regional currencies, reflecting the robust stability of its financial sector compared to smaller banks facing challenges like undercapitalization and insolvency. The recent liquidation of Mercantile Bank Limited spotlighted the necessity for adequate capitalization and governance within financial institutions to enhance systemic stability and adaptability to economic shifts. The central bank's capital requirements revision in 2022 aimed to fortify the sector's resilience to shocks and align with the dynamic demands of the evolving economy. Despite regional uncertainties and banking sector transformations, Uganda's shilling stands out as a beacon of strength in East Africa's currency landscape.