East African currencies have been struggling against a strong U.S. dollar since the beginning of the year, with the Ugandan and Tanzania shillings taking the biggest hits.
The dollar, which has been on a rally due to impressive performance by the U.S. economy amidst a slowdown of other major global economies, has seen the Uganda shilling lose 27 per cent to trade at UGX 3,480, while the Tanzania currency has shed 16.8 per cent since the beginning of the year to trade at TZS 2,070. The Kenya shilling has lost 9.4 per cent to trade at KES 100.5, and the Rwandan franc 4.2 per cent and is currently trading at RWF 725.
The strengthening of the dollar against the regional currencies has sent the region’s central banks back to the drawing board, in a bid to tame the dollar’s rally and ensure stability. The central banks have frequently intervened in the financial markets to try and save the domestic currencies but this has not yielded any substantial results.
Fearing that the direct market interventions in the currency markets would dry up their foreign reserves, the region’s central banks resorted to increasing their base lending rates. Uganda’s Central Bank was the first to increase its Central Bank Rate from 11 per cent in January 2015 to 13 per cent currently, Kenya’s Central Bank followed suite by increasing its CBR from 8.5 per cent to 11.5 per cent at present.
Rwanda has for the past 12 months retained its CBR at 6.5 per cent, while Tanzania has instead raised its statutory minimum reserve ratio for commercial banks to 10 per cent, from 8 per cent, as part of efforts to check the currency volatility.
The free fall of the regional currencies has already induced inflationary pressures, which has seen inflation for Kenya, Uganda, Tanzania, Rwanda and Burundi increase from 6.0%, 1.3%, 4.0% 1.4%, and 3.5% in January 2015 to 7.0%, 4.9%, 5.3%, 2.0%, and 7.5% in June 2015 respectively, and is expected to increase further if the currencies continue to depreciate.
Regional economies and companies are also facing a rising burden of meeting interest and principal payments on foreign currency-denominated loans because of the poor performance of their currencies against the dollar and other major currencies.
Looking ahead, Analysts expect the downward trend of the regional currencies to continue in the medium term, as they continue to hurt by a swath of factors such as; the widening trade balances, continued US dollar rally, the economic crisis in the Euro Zone, depleted foreign exchange reserves, and the geopolitical situation in Burundi and South Sudan which has shrank intra-regional trade.