Looking beyond Mutebile to save shilling

Bank of Uganda chief, Emmanuel Tumusiime-Mutebile has been in the eye of the storm in what could be his last few months as the governor.
His fourth five-year term as governor expires on January 11, 2016 but could be renewed at the discretion of the President.

Mutebile’s admission to manufacturers two weeks ago that the Central Bank cannot continue to intervene in the market to prop up the ailing Shilling became a subject of debate in the country and beyond and his comments were seen as a sign of weakness from BoU, considering it is the only institution that could save the unit in times of dire need.
In as much as he admitted this, BoU did intervene in the market twice last week to bring down the Shilling to nearly Shs3,345, however, the dollar has been fighting back as it continues to strengthen globally.

Declining foreign reserves
The focus of BoU is to continue and build reserves that have shown signs of decline.
Notably, Mutebile told manufacturers continued intervening in the foreign exchange market was not sustainable and “…would simply deplete its exchange reserves...”

Data from BoU indicate that in the third quarter of 2014/15 – period between March 2015 and May 2015 – the foreign assets account had dropped to $2.8b from $3.3b in the second quarter of 2014/15, partly because of continued intervention in the currency market.
Since January 2015, BoU had pumped in excess of $210m in the market to save the Shilling, the same amount by which the Central Bank needs to increase its reserves in this current financial year.

Foreign reserves are often held by central banks world over to cater for trade imbalances and check the impact of currency fluctuations. The current size of reserves means Uganda is able to provide import cover of four months – in case of a rainy day.
With all eyes on Mutebile, the solution to save the Shilling appears to be beyond this man, considering the current depreciation is a cocktail of events worsened by a stronger dollar, high imports, fall in the value of exports, a decline in FDI and speculation of election spending.

Oil sector boost for FDI
In 2014/15, Uganda recorded a 20 per cent decline - $250m - in Foreign Direct Investment (FDI), a sector that forms a large percentage of expected dollar inflows, together with remittances and exports to Europe and East Africa.
By March 2015, there were already signs of dwindling FDI inflows, especially with the fall in global oil prices and as he [Mutebile] does admit delayed issuance of production licences to oil companies is affecting the FDI account.
“The fall in FDI in the last fiscal year was mainly because of lower foreign investment in the oil industry, caused by delays in reaching agreements between the oil industry and government …,” he told manufacturers recently.

Oil companies, including Total, Cnooc, and Tullow, have laid-off workers and scaled back on their operations as the delayed licences issuance coincided with fall in global oil prices.
If production licences are issued, the projection from oil companies is that it could unlock financing of projects to a tune of $10b – about 38 per cent of the size of Uganda’s economy.
The Central Bank is banking on licences to be issued to unlock the investments in oil fields, roads, pipelines and more jobs.

The protracted negotiations are now in their third year as government continues to disagree with oil companies on modes of extraction.
This docket is not for BoU but lies squarely with Irene Muloni, the Energy minister, who in a recent interview was non-committal on when the licences will be issued.
“We are in advanced stages with oil companies. They’re supposed to submit more documentation at the end of this month, but the bulk of the work has been completed,” she said.

Buy Uganda Build Uganda
Uganda is currently on an importing binge, at least according to the numbers. In 2014/15 Uganda imported at least $2.9b more than it exported. The value of Uganda’s exports also dropped, largely due to falling volumes in the coffee sector and a drop in prices for the tea sector in 2014.

In October 2014, ministry of Trade came up with the Buy Uganda Build Uganda Policy and according to Amelia Kyambadde, the purpose was to “ensure that the promotion of the consumption of locally produced goods is integrated into their policies and procedures.”
The ambitious policy points to at least 20 per cent of all government procurement going to Ugandans, 50 per cent shelf space in supermarkets being given to local companies, half of all local products conforming to international standards and 50 per cent value addition using local materials.

Improved quality and better trade negotiations
There is an admission that Ugandan products are of low standards and inferior to well-established brands.
The local textile industry continues to limp as competition from imported second-hand clothes provides cheaper alternatives.
Nytil recently announced it was laying off at least 300 workers as keeping the factory operating was proving to be unprofitable.

At a recent private sector conference organised by Konrad-Adenauer-Stiftung, Kyambadde told this newspaper she had intervened and negotiated with police and the army to purchase uniforms from Nytil, however, the factory managers insist the market is not big enough for their production capacity.
Notably, Uganda grows cotton, but the bulk of it is exported in raw form. Between 2010 and 2014, Uganda’s earnings from textile were nil, according to BoU statistics. Raw and processed cotton exports have also fallen from $86m in 2011 to $28m in 2014. Volumes have also dipped from 138,301 bags in 2011 to 40,671 bags in 2014.

A self-imposed ban on exports to the EU – over poor standards – implemented in May 2015 has seen Uganda exporters lose nearly $70m, according to Uganda Exports Promotion Board (UEPB).
Maria Odido, the chairperson of UEPB says this self-imposed ban was as a “result of complaints from EU of the quality of goods.”
The task at hand also includes Uganda negotiating better trade terms that work in Uganda’s favour to boost exports.

Uganda has been negotiating the Economic Partnership Agreements – to export at zero rated charges to the EU.
Also in June 2015, 26 African countries, including Uganda signed the African Tripartite Free Trade Area that would see exports and imports within those countries move without duties being imposed.
The largest formal export destination for Uganda is the Comesa region, where Kenya, South Sudan and DR Congo are top markets respectively. Outside of Africa, the EU is the largest market with $530m worth of exports as of 2014.

Other interventions

Some economists argue there is need for government to institute capital controls to restrict the shipment of profits by multinationals out of the country in order to reduce the amount of dollar outflows.
For instance in the insurance sector, the Insurance Regulatory Authority requires firms to invest at least 5 per cent of their profits in Uganda, something that is not simulated in other sectors.
In the 2015/16 Budget Speech, Finance minister Matia Kasaija announced Uganda’s first Export Processing Zone in Kaweweta, Luwero District, saying the zone would consist of a “world class modern abattoir, milk and fruit processing plants, an area for a modern farm, a textiles manufacturing plant, and refining local medicinal and aromatic herbs.”

Companies operating in such a zone get tax exemptions; labour law restrictions often don’t apply and have their goods fast-tracked to international markets, which would help improve quality and standards.
There is also anticipation for the Chinese Exim Bank to release funds meant for the construction of the Karuma and Isimba Hydro Power Projects – these are estimated to be about $1.2b (Shs4.2 trillin), which would help to ‘prop-up’ the shilling as purchase of some goods and labor would be done in Uganda.
Additionally, other projects like the Standard Gauge Railway and oil refinery would make some dollars available on the market, easing pressure on the shilling.