Kasaija’s Budget, fails to inspire, the Shilling
A forex bureau chart. The Kenya shilling extended gains for a second day on tight market liquidity, even as analysts remain divided over the Wednesday MPC rate decision. PHOTO BY DOMINIC BUKENYA
Kampala- Matia Kasaija’s first Budget as Finance minister was delivered in the most unusual ways. Often, Kasaija used off-the-cuff comments, unusual for any Finance minister in the last 28 years of the current government.
It saved many from the usual sleeping ritual. However, the Shilling has not enjoyed similar momentum. Since Kasaija’s Budget was read, the Shilling has depreciated by 3.2 per cent, hitting yet another new high of Shs3,200 against the dollar this week. The markets, in other words, are punishing the Uganda Shilling.
One key observation made by economists about the Budget was that there were no short-term efforts available to save the Shilling from the poor showing.
“There was no specific mention on measures to save the shilling other than mentioning broad objective of maintaining macro-economic stability,” Mr Stephen Kaboyo, managing partner, Alpha Capital Partners, told the Daily Monitor.
In the Budget speech, Mr Kasaija did acknowledged the depreciation and efforts by Bank of Uganda (BoU) to save the Shilling.
Limited options
“The policy of smoothening the exchange rate movements will continue, in order not to cause undue instability in the business climate,” Mr Kasaija read in the Budget speech.
Mr Kaboyo notes that the authorities have limited options and that BoU’s intervention will not exactly solve the Shilling from sliding further.
“Intervention on the sell side of the market that is applied to manage volatility in times like these would have minimal impact and would not change the trend because of global dollar strength,” he adds.
Boost exports
Mr Kasaija highlighted boosting the export sector and specifically mentioned value addition.
However, at the Uganda Economics Association (ESA) post-Budget review, most speakers appeared to agree that there will be continued demand for imports, and that will pile more pressure on the Shilling.
“In the last 10 years, exports have not increased to levels we can say are impressive. On imports, we continue to see a sustained growth each year,” says Dr Fred Muhumuza, one of the panelists at the USA post-Budget review.
BOU reacts
The proposal for the short-term has been to tame the shilling through the Central Bank Rate (CBR). BoU has duly complied with this by increasing the CBR to 13 per cent in order to tame inflation.
Since Uganda is an import dependent country, prices on commodities have been rising on account of the Shilling depreciating.
“The exchange rate pass-through and strengthening of economic activity both at home and abroad, will exert further pressure on consumer prices over the medium term in the absence of further tightening,” says Prof. Emmanuel Tumusiime-Mutebile, Governor BoU in the June 2015 Monetary Policy Statement.
Uncertainty on market
Uncertainty on the market can’t be downplayed as it has been seen when government announced plans for a supplementary budget of Shs860b back in February 2015, the Shilling depreciated even further. Additionally, on the announcement that the Budget was increasing to Shs23.9 trillion from Shs15 trillion in 2014/15, the speculation was rife that this could be election spending money.
Ms Anna Lucia Coronel, IMF Uganda Country Representative, notes that “government needs to communicate better to avoid speculation.”
