NO SHORT TERM REMEDY FOR SHILLING, ECONOMY

The shilling fell to historic lows last week on a rumour that central bank governor Tumusiime Mutebile had handed in his resignation. This came hot on the heels of the Bank of Uganda boss’ published reservations on the management of the economy.

Since then importers, read Kampala City Traders Association (KACITA), have been up in arms and have threatened strike action if government does not do something about the shilling. It was even suggested that the government should hold the shilling at a certain price.

The President has since penned his opinion on this current “crisis”. Given his first hand experience with the economy over the last 25 years he is understandably dismissive of suggestions that this is a crisis and has counseled that we need to stay the course, make the long term beneficial decisions and steer clear of short term populist measures whose repercussions could unwind years of economic gain.

Whether we keep a long term view or succumb to pressures for short term remedies will be determined by our politics. Let us wait and see.

There are several reasons the shilling-dollar relationship has not been in the our favour in recent months. A slow down in inflows -- investment and tourists, ahead of the February polls, lower export earnings from traditional sources – the main coffee season is over, and election related overspending. Internationally the dollar has been strengthening on growing uncertainity about the viability of the Euro zone, a hint of recovery in the US economy and rising oil prices.

As a country we can influence our level of fiscal discipline or lack of thereof and to some extent the rate of inflows into the country, we have little if no say about what happens on the international currency markets.

"The shillings decline is a symptom of structural deficiencies in our economy. At a fundamental level our currency will appreciate or depreciate depending on external demand for it. Are we producing, can we produce, stuff that will be in demand externally and therefore increase demand for our shilling, therefore causing appreciation?...

As it is we are still exporting raw coffee, tea, fish and labour. We are a commodity exporting country. The problem with commodities is that it does not take much science to replicate them and therefore they are not very expensive.

For instance fifteen years ago Vietnam was not a coffee exporter of any reckoning but have since boosted production to the point that they are second only to Brazil in Robusta coffee exports, affecting Uganda’s major forex earner.

As I see it we have two options either we grow more coffee so we can export more raw beans at lower and lower prices per kg or we start processing our own coffee and exporting it as a higher value product.

The more sustainable solution is the latter but this will take a lot of government support in low cost financing, funding of research and development and marketing abroad. A solution we should have started on yesterday and will take another generation before sustainable results are realized.

"Uganda is also especially vulnerable to currency movements because many of our manufacturing inputs are imported. In fact only a few days ago Ugandan manufacturers got another extension for some semi processed imports to continue being classified as raw material imports into the East African Community. So they suffer less tax...

In the long term we are going to have to reexamine the structure of our manufacturing sector before the unforgiving hand of the market lays down the law.

Many of our manufacturers are assemblers and packagers of already finished goods. They continue to “manufacture” goods they have no competitive advantage being involved in. This is critical because as it is now China is fast becoming the factory of the world – there are very few things that can be manufactured cheaper than in China because of their economies of scale and cheap labour.

Our manufacturing needs to be angled more towards agriculture where we have a decided competitive advantage. To reengineer our manufacturing sector in that direction cannot be done overnight.

In short there is no real short term relief to our currency woes. Politics can dictate that we put a plaster on a broken economy, but it will be a short term solution that will give the false impression of relief but in the long term come back to haunt us.

As for those people suggesting government should hold the shilling exchange they need to think again. Trader turned philanthropist George Soros cemented his reputation in the 1990s when he bet against the pound, judging rightly that UK’s economic fundamentals could not hold the pound to a certain level. The Bank of England pumped in billions to support the pound but eventually had to give up and allow the pound to find its market determined level. It is said Soros made at least a billion dollars on that trade. He did it again during the Asian crisis in 1997.

"Rest assured the moment the Bank of Uganda attempts to defend the shilling, speculators – not Soros, Uganda is too small for him, will beat a path to our shores. And when we invariably fail to defend our shilling 4000 to the dollar will not be a far off fantasy....