The Economics behind the depreciating Uganda Shilling

Wednesday June 22, 2011

A weak currency tied with high global energy costs and rising inflation is pushing the costs of doing business, forcing businesses to raise prices as they struggle to meet their operational costs.

The Ugandan shilling has been trading at an average of sh2,400 against the US dollar compared to sh1,870 against the greenback in same period last year.

However, the shilling briefly traded at sh2508 per dollar yesterday before the Central Bank sold an unspecified amount of dollars into the market.

Global crude oil price went up to $112 a barrel compared to $90 it traded in October last year.

This has partly pushed inflation – the cost of living measure – to 16%, up from 5.2% the same period.

A rise in global crude oil and commodity prices could expose Uganda’s economy to imported inflation and exchange rate instability.

This has left businesses, including the newspaper and print industry, with no option but to pass the costs to consumers.

“The biggest element is the depreciation of the shillings because it affects our inputs. We import newsprints and pay in dollars,” Zubair Musoke, the Vision Group chief finance officer, explained.

“Also, local inflation has affected our operations (in terms of producing) goods and services and distribution. These high costs are not good for us. At some point, we will be forced to share the rising costs with our clients.”

Most businesses use generators, but high global oil prices coupled with fuel scarcity has pushed fuel pump prices up. Firms factor-in operations costs into consumer prices.

Fuel price changes affect all sectors of the economy, although there may be a time lag before the fuel price increases are felt across the board.

Uganda is not isolated. Inflation in East Africa’s third largest economy’s major trading partners also continues to rise.

Inflation in the Eurozone, China, India and Kenya, Uganda’s largest trading partners, has been on the rise. This is expected to persist given the global outlook.

Statistics from the Central Bank indicate that goods from China, India and other East Asian countries are increasingly becoming more expensive because of “a combination of the nominal exchange rate appreciation and cost increases in these economies and the shilling depreciation.”

“China’s consumer prices rose by 5.5% in May, with expectations that it will hit 6% in June. Inflation in India was reported at 9.41% in April,” the Central Bank data indicated.

“As costs go up in China and India, they charge more for products, meaning Ugandans will have to pay more for the products.

“A sustained rise in the cost of imported goods could generate further imported inflation.

“It is very difficult to tell when the trend will reverse,” the bank added.

The trade weight of China and India is about 13% of Uganda’s total trade and is much higher for imports.

According to the Uganda Bureau of Statistics, factory prices rose by 23.3% in February compared with the same period in 2009.

Imelda Atai, the principal statistician, said in April “the long, dry spell increased costs of production due the rise in international oil prices and the weak shilling contributed to the rising costs of the manufacturing sector.”

A poor current account, coupled with tight dollar inflows and a strong demand for the greenback has pushed the Uganda shilling to low record- breaking levels.

The shilling was yesterday morning trading at 2495 for the telegraphic transfers and 2475/2490 on the- boards against the dollar, up from the early afternoon rate of 2460/2485.

The pound sterling was posted at 3990/4045 for buying and selling, while the euro traded at 3510/3580.

The depreciation that has been recorded in the past few days is said to have been driven by commercial banks sourcing for dollars to cover their short dollar positions and strong demand from the manufacturing, telecoms, oil and energy sectors.

The fall of the shilling has caused mixed reactions among the business community and consumers, who have called for urgent measures to tame the unit from further depreciation.

“Our stocks have dropped because we import the goods expensively, yet we cannot increase prices daily.

“We are traders and must make profits. If we fail to achieve that, we will be out of business and will drag the economy along,” explained Issa Ssekito, the Kampala City Traders Association spokesperson.

“Most importers are holding buying positions. That why the Central Bank’s intervention has had a low impact on the rates.

“The whole of East Africa is faced with the same problem; so the East African Community Central Banks must moot a plan to stop their currencies from further depreciation,”Akash Kumar, the Midcom general manager, said.

The firm distributes Nokia products.

By Ibrahim Kasita and Macrines Nyapendi: The New Vision Newspaper