Paying the price for a shaky Uganda shilling

Thursday, 4th August, 2011

THE turbulent exchange rate has pushed traders of imported goods to charge customers in dollars. The shift was pioneered by property dealers and tour and travel agencies, but more traders are taking it on.

Until recently, the shilling has been a stable currency and the dominant medium of exchange for most transactions. But given an efficient foreign exchange market, the dollar, the pound and the euro are becoming widely accepted.

Most import shops in Kampala set prices in US dollar based on the day’s exchange rate.

In June, the shilling slumped to sh2,730 against the dollar, its weakest level since 1993, making it the fourth-worst performer worldwide after Suriname’s dollar, Maldive’s rufiyaa, and the Kenya shilling.

However, the shilling has lately started gaining against the dollar, opening the week at 2,635 (buying) and 2,660 (selling).

Despite this, notice boards in multinational shops like Nakumatt, Game Stores and Steers remain pasted with announcements of used cars, pets and frocks in foreign currency.

Property owners in areas like Bugolobi, Muyenga and Mbarara also peg their rent rates in dollars or euros.

Prabhu Kumar, the operations manager at Express Automation, dealers in stationary machinery, explains that the shilling depreciation had led them to sell in dollars to remain in business rather than to make a profit.

He says pricing in shillings would cause them huge losses, while selling in dollars has cost them a large portion of their clientele. He estimates that 20% to 40% of their clients had been lost to pricing in dollars between June 2010 and June 2011.

“It is hard to get the exact price of a product in shillings because the exchange rate keeps fluctuating. At one point, it is at sh2,700 and another time, it is at sh2,500. This makes us price in dollars, which are more stable,” Kumar observed.

“Most customers lack the dollar-buying power. This has seen our sales reduce by about 20% to 40%. A product that costs sh2m at an exchange rate of sh2,400 per dollar will cost close to sh2.2m when the rate changes to 2,700 and yet no customer is willing to pay the sh0.2m difference,” he says.

The volatile exchange rate, coupled with high inflation, which jumped to 18.7% in July, forced the Kampala City Traders Association (KACITA) into a two-day strike, asking the Government to act.

Issa Sekitto, the KACITA publicist, noted that the weak shilling has led rent charges to spiral.

“When the shilling drops from 2,000 to 2,700 against the dollar that is outrageous. The exchange rate usually goes up and not down, increasing the cost of rent for traders in those small shops in arcades, who have to pay royalties and other fees,” he said. Sekitto says the traders have arranged a meeting with the association of landlords in Kampala to iron out the dollar rent payment issue.

The Bank of Uganda (BOU) has attributed the fall in the shilling value to high demand for the dollar internationally due to the conversion of assets in euros to dollars arising from the Euro debt crisis. This situation is complicated by a fall in aid inflows and the decline in export receipts.

Adam Mugume, the former BOU director for research, explains that the fall in the value of the shilling did not surprise them because it was projected eight months ago.

“Where the exchange rate is today is what we projected last year in November. We knew that based on our current account position and declining aid inflows that an exchange rate of sh2,600 was possible. When the exchange rate hit sh2,700, we knew that was speculation,” he said.

Mugume said the Central Bank has initiated tight monetary control measures to eliminate speculation that has caused a rapid fall in the currency contrary to market fundamentals. He said by the time the new monetary stance was started, commercial banks had over sh200b that they could use to speculate and influence the exchange rate. This was on top of their reserves with the Central Bank.

“But now most of them depend on customer deposits to lend on a daily basis,” Mugume says.

He adds that the full effect of the tight monetary policy would take at least one or two years to bring down the exchange rate and stabilise the economy. Until then, Ugandans should brace themselves for charges in dollars and higher interest rates as businesses try to stay afloat.

By Samuel Sanya and Titus Kakembo: The New Vision Newspaper