Exporters are gnashing their teeth in frustration at the gains the Uganda shilling has made against the US dollar in the last two months.
A combination of pre-election jitters, uncertainty in the Euro zone and less than usual export receipts at the beginning of this year conspired to push the Uganda shilling to historic lows against the dollar and other major currencies.
At the beginning of September the shilling touched crossed the sh2,900 on the inter-bank market and the actually touched in sh3,500 at some forex bureau. Since then the shilling has gained dramatically against the dollar to just over sh2,400 in the inter-bank market on Monday and sh2,450 in forex bureau around Kampala.
The double digit appreciation has placated importers, who had protested vehemently against the earlier loss of value by the local currency so much so that they suggested that the central bank fix the rate at more favourable level.
At the time President Yoweri Museveni shooed off the importers, declaring that a weaker shilling is good for exporters and his government was not going to deliberately try to redress the shilling’s slide.
However inflation too was hitting record highs – topping off at 30.4% in October the highest since early 1993, fuelled by higher food prices, campaign related spending and as a result of the shillings depreciation, fuel prices rose with the attendant upward ripple effect on other prices.
In scrambling to rein in inflation, which is too much money chasing too few goods, Bank of Uganda started aggressive efforts to mop up excess cash by stepping up its treasury bill and bond auction and by raising the Central Bank Rate to reduce borrowing and therefore money in circulation.
The newly introduced Central Bank Rate (CBR) is an indicative rate commercial banks use to determine their own lending rates.
As a result of this the yields on treasury bills and bonds have more than doubled since the same time last year. The benchmark 91-Day treasury at last week’s auction averaged 23.39% compared to 8.1% average in December last year.
The attractive yields – the best in the region compared to Kenya’s 17% and Tanzania’s 12.4%, has attracted foreign investors, which new demand for shillings has been the main cause of the local currency’s gains in recent weeks.
“The preferred situation for my exporters is that there be predictable conditions and preferably favourable to us compared to our export markets,” said Uganda Export Promotions Board boss Florence Kata.
“The current appreciation on the shilling only makes sense to exporters on their imported inputs, but the shillings he is getting for his products are less, inflation is high, bank lending rates are through the roof … I know a few who have rolled back their production they are adopting a wait-and-see attitude,” she said.
Other challenges are that Europe has had a longer summer and therefore some of their exports which can still be sourced in southern Europe have not seen the seasonal kick in prices that comes with onset of autumn in October.
On a more individual basis exporters are complaining that they are in the red.
“Look I bought inputs when the dollar was at 2,900 and now I am having to sell at 2500, I am running at a loss,” said a major exporter, who chose anonymity for fear of being misunderstood.
“This country really has to decide what it wants, do we want to support producers, job creaters, tax payers or do we want to subsidise consumers…. We talk one thing and our actions point in the other direction,” the visibly irritated exporter said.
The central bank tasked with maintaining price stability, acknowledged the difficulties the exporters are facing, but argues that not to have taken the action they had taken would have buried those very same exporters.
“We knew that this is the price we would have to pay but letting inflation gain momentum is not an option we can consider,” deputy Bank of Uganda Dr Louis Kasekende said.
He said that the tools the central bank has at its disposal are short term in their action and that we would have to take a harder look at our economy and explore more medium to long term interventions.
While brushing aside talk that the Ugandan economy has been shown up to be more style than substance like Goloola Moses, Kasekende suggested areas our planners should seriously look into.
“To begin with we may need to rethink how much national reserves we should be holding. If we did not have credible reserves we might not have been able to fight off inflation. So maybe we should focus on targeting more than the four month’s worth of imports we are currently operating under,” he said.
In addition he suggested that we may want to review our manufacturing subsidies and realign them with our natural comparative advantages and also boost support to the agriculture sector, seeing how a shock to food security in the region can have a ripple effect through the economy.
“This global financial crisis has forced a rethink of quite a few economic theories we have been operating under. It cannot be business as usual after this,” Kasekende said.