June 21, 2018 / 11:40 AM / 2 months ago

UPDATE 1-Ugandan shilling weakens to all-time low of 3,890/3,900 to dollar - traders

(Adds quotes, background)

By Elias Biryabarema

KAMPALA, June 21 (Reuters) - The Ugandan shilling weakened to an all-time low on Thursday as interbank players exerted strong dollar demand while the central bank held back from another intervention, traders said.

The shilling has experienced an accelerated depreciation over the last three months and is now 6.6 percent weaker against the U.S. currency so far this year.

In recent years Uganda has seen growth of around 4 percent, below what the central bank says is the economy’s potential growth rate of 7 percent, largely on account of weak agricultural output and exports which has lead to lower inflows of hard currency.

The country’s economy has also been hurt by regional conflicts in South Sudan, Burundi and eastern DRC.

At 1015 GMT commercial banks quoted the shilling at 3,890/3,900, weaker than Wednesday’s close of 3,880/3,890.

“Policymakers believe that the weaker currency is being driven by fundamentals. That is improving domestic demand and they further expect expansionary fiscal policy to increase public sector import demand,” Jibran Qureishi, regional economist for East Africa at Stanbic bank said.

“Hence, according to them, selling dollars into the market may not work as the rising import bill will dwarf their intervention.”

After staying on the sidelines amid the shilling’s rapid weakening, the Ugandan central bank intervened on June 8 and sold dollars to try to restore stability.

“Too much negative sentiment amongst corporates in the market...is not helping,” Qureishi added. “When importers believe that 4000 level is in sights, they would just prefer to frontload their import requirements.”

The intervention achieved only fleeting relief for the local currency and a trader at a leading commercial bank said the bank’s refusal so far to intervene a second time was eroding confidence in the local currency.

“There’s strong speculative demand in the interbank and from importers and BoU (Bank of Uganda) being absent is adding fuel to fire,” the trader said.

Uganda expects economic growth of at least 6 percent in 2018/19 (July-June) from 5.8 pct in 2017/18, partly helped by public infrastructure investments, Finance Minister Matia Kasaija said on June 14 during the budget announcement. (Reporting by Elias Biryabarema; Additional reporting by Omar Mohammed; Editing by Toby Chopra)

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