Changing trade patterns and transaction losses in the face of a strong dollar have helped make Kampala a more vibrant forex market after years of domination by hard currencies, the Kenya shilling and the South African rand.
The dollar, the pound sterling and the euro have been the key denominators of forex trade for decades but times are changing with previously illiquid legal tenders like the Australian dollar, Canadian dollar, New Zealand dollar, Hong Kong dollar, Norwegian kroner, Zambian kwacha and Malawian kwacha now exchangeable at forex bureaus.
This is reflected in the number of forex bureaus trading in the less popular currencies increasing from one in 2015, to six at the end of 2016. Forex dealers project the basket of currencies available will increase, driven by the demands of traders and tourists.
Gains by the dollar since 2015 have led to the growing interest in direct conversion of currencies with less reference value as traders try to avoid losses. Clients converting Uganda shillings into different currencies with the dollar as a middle currency have suffered conversion losses.
For example, if one converts Uganda shillings to dollars and then converts the dollars to Saudi riyals, one loses about 17.2 per cent of the transaction value between the shilling and dollar.
However, one would make a transaction gain of about five per cent between the dollar and riyal because the latter is fairly stable given the controlled float system deployed in many oil rich Gulf states.
At the end of the day, the client would make a net currency transaction loss of 12 per cent. Under these circumstances, a direct currency conversion option would minimise such losses.
The Uganda shilling lost 17.2 per cent against the dollar during 2015/16, a drop largely attributed to seasonal capital flight, especially before the general election held last February, and a widening current account deficit.
The shilling is expected to weaken further against the dollar before the close of the first quarter of 2017 as large companies repatriate dividends to foreign shareholders.
Whereas Uganda imports a huge variety of goods from China annually, gradual relocation of manufacturing operations from the world’s second largest economy to other Asian countries such as Indonesia and Malaysia that offer cheaper labour costs has forced local importers to change their currency preferences.
China accounts for around Ush2.8 trillion ($832.8 million) of Uganda’s total imports, which amounts to a 24 per cent share, according to Uganda Revenue Authority data. Some of the affected importers include businesses engaged in distribution of household products, particularly kitchenware and electrical appliances.
“The dollar has strengthened a lot in recent years and this has forced some traders to avoid indirect currency conversions involving it, which usually cause transaction losses. As a result, a trader who imports goods from Singapore would prefer to convert Uganda shillings directly into Singapore dollars so as to avoid currency conversion losses,” said Edward Kigongo, the chief executive officer of Ken Group Ltd, a stationery materials supplier, adding, “Growth in the number of tourist arrivals from countries outside the United Kingdom, especially oil producing nations like Norway, and a shift in production zones from China to countries such as Indonesia, has also caused indirect demand for less popular currencies.”
Currently, the Norwegian kroner is quoted at Ush6,000/Ush10,000, reflecting a wider trading spread compared with the Australian and Canadian dollar, which are quoted at Ush2,000/Ush3,000 respectively.
The dollar and Kenya shilling in contrast have smaller trading spreads, with forex bureaus quoting them at Ush3,570/Ush3,590 and Ush32/Ush34 respectively.
“The spreads attached to less popular currencies are determined by volatility and uncertainty risks perceived by forex traders,” argued Stephen Mwanje, a forex bureau owner.