Panic selling by Ugandan banks and forex dealers has triggered sharp depreciation of the Kenya shilling versus the dollar, coupled with a scarcity of the Kenyan unit. Consequently, the Kenya shilling exchange rate versus Uganda shilling slumped from an average Ush30 to a record low of Ush24 last month. But the Kenya shilling slightly recovered to Ush26/27 against Uganda shilling.

A spot-check in Kampala’s downtown forex bureaus show an apparent scarcity of Kenya shillings among forex dealers despite an open capital account regime that allows seamless entry and exit of foreign currencies in Uganda’s financial system.

Kenya paid off a few huge foreign loans that depleted its forex reserves during the first quarter of 2023.

The balance in its reserves was not enough to clear future debts or defend its currency against external shocks.

Read: Kenyan shilling hits new low against dollar

Ugandan banks and forex dealers opted to sell most of their Kenya shillings in exchange for dollars for fear of incurring trading losses on their books. This explains the scarcity of Kenyan shillings,” Allan Lwetabe, Investment Director at Uganda’s Deposit Protection Fund said.

“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.

An Entebbe Airport-based forex bureau quoted the Kenya shilling versus Uganda shilling exchange rate at Ush18/28 (buying and selling) on the morning of June 12, 2023. That is a whopping 10-shilling spread.

Read: Bank of Uganda holds rate steady to sustain fight against inflation

“I did an export transaction 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.