Panic sale by Ugandan banks and currency traders has resulted in a dramatic devaluation of Kenya shilling relative to the US dollar, as well as a shortage of the Kenyan unit.
As a result, Kenya shilling to Uganda shilling exchange rate fell from an average of Ush30 to a record low of Ush24 last month. However, the Kenya shilling rebounded marginally to Ush26/27 versus the Uganda shilling.
Despite an open capital account framework that facilitates frictionless admission and exit of foreign currencies in Uganda’s financial system, a spot-check in Kampala’s downtown forex bureaus reveals an apparent scarcity of Kenya shillings among forex dealers.
During the first quarter of 2023, Kenya paid off a few large international debts that had drained its foreign reserves. Its reserve balance was insufficient to settle future obligations or safeguard its currency against external shocks.
For fear of incurring trading losses on their books, Ugandan banks and forex dealers chose to sell the majority of their Kenya shillings in exchange for dollars. This explains why Kenyan shillings are scarce,” said Allan Lwetabe, Investment Director of Uganda’s Deposit Protection Fund.
“The recent political protests in Kenya caused worry among investors and this led to capital flight within the country’s financial markets. This wave of fear also caused panic among Ugandan banks and many of them were forced to exit their long-term Kenya shilling positions.
As a result, several banks offloaded lots of Kenya shillings over the past two months replacing them with dollars or taking up currency swaps. The Kenya shilling short-term outlook remains fragile because of unresolved domestic political issues,” said a trader at Stanbic Bank.
On the morning of June 12, 2023, an Entebbe Airport-based currency bureau quoted the Kenya shilling vs Uganda shilling exchange rate as Ush18/28 (buying and selling). That’s a hefty 10-shilling spread.
“I did an export transaction in early June when the Kenya shilling value stood at Ksh137 to the dollar. By my second transaction, the Kenya unit had depreciated to Ksh139 to the dollar. On my third transaction last week, the shilling had dropped to Ksh142. This has compelled me to pay in dollars whenever I buy new stock to avoid currency losses,” Dick Wadada, a hardware trader said.
