The Ugandan shilling breached the 4,200 per dollar threshold on Wednesday, 21 October, while Treasury bill yields rose sharply after the Bank of Uganda raised its policy rate.
The currency traded at 4,205 shillings to buy and 4,215 to sell, compared with 4,180 and 4,190 at the opening, according to a market report from Absa cited by New Vision. Traders attributed the decline to demand for dollars from importers and energy companies, against limited foreign currency inflows.
At the auction held the same day, the central bank accepted 372.55 billion shillings at face value, against an initial offer of 350 billion. Yields on the 91, 182-day and 364-day securities rose by 155, 265 and 300 basis points respectively, to 11.249%, 13.400% and 14.499%.
The Bank of Uganda had raised its policy rate on 14 October by 225 basis points, from 9.75% to 12%. The tightening reduced shilling liquidity in the money market, according to Absa.
The fall in the currency makes shilling costs higher for importers who pay for their purchases in dollars. It also increases the burden on unhedged borrowers, while about 32% of bank loans were denominated in foreign currencies, according to the October bulletin of the Uganda Bankers Association cited by Daily Monitor.