Is Uganda becoming a dollar economy?

The shilling continues to take a beating against the dollar breaching the Shs3,320 mark.
The depreciation, rapid as it is has been piling pressure on product prices and is likely to spike prices much further.
However, amid all this, a number of businesses have moved away from pricing their products using the shilling to the dollar.
Typical of this are tenants in much of Kampala whose fees are now pegged on the dollar.

Samuel Mwesigwa Mafende, a general merchandise trader in downtown Kampala, says: “It is bad for us. Our income being in shillings means that we have to pay much more in terms of rent.”
For instance, he says: “I pay $21,900 [for three months]. In October last year I paid Shs56m, however, this has risen to Shs71m.”
The shilling has since the beginning of this year lost by more than 20.9 per cent, according to Bank of Uganda.
And for trader it is a tale of rising cost of business, considering that most of them earn in shillings but transact (rent and import) in dollars.
It has become common in Uganda for some business, especially in the hospitality, entrainment and rent to peg their charges to the dollar as they hedge against the risks of the ever weakening shilling.
Marc Du Toit, the head property management at Knight Frank Uganda, notes that for some businesses billing in dollars “…is about hedging against risks”, something which Ramathan Ggoobi, an economics lecturer at Makerere University Business School, believes is done because businesses want to insulate themselves against inflation.

“With dollarisation, inflation uncertainty is lower. Businesses, especially multinationals, which transact in dollars, cannot peg their goods on the shilling whose value has steadily been eroded by inflation and exchange rate depreciation,” he says.
However, the trend if not tamed might turn out to be a long term defect that might lead to a complete dollarisation of Uganda’s economy.
In 2009, Zimbabwe suspended its own currency (Zim dollar) after inflation had massively eroded the currency’s value.
The currency had lost massively necessitating people to carry large sums of money to purchase basic goods such as bread and household items.

“In Uganda’s case it is partial currency substitution – a growing proportion of people is transacting using dollars because of a bad track record of the shilling. The partial and unofficial dollarisation is intended to eliminate exchange rate volatility,” Ggoobi says.
However, to the central bank this ‘analogue’, of dollarisation is far-fetched and without evidence.
“The ratio of foreign currency deposits to total deposits in the banking sector has averaged around 31 per cent since August 2011. Organisations such as embassies, multinational companies and exporters that hold foreign currency deposits maintain them because their operations necessitate it. This does not imply that there is dollarisation of the economy,” Christine Alupo, the central bank director for communications, says.

“There is, therefore, no evidence to indicate that the economy is dollarised as the proportion of Ugandans who must transact using forex remains a minority,” she adds.
The central bank uses foreign currency denominated deposits as a measure of foreign currency in circulation.
As of November, foreign currency deposits stood at Shs4 trillion, according to the central bank.

However, as the central bank agrees, economists say it is hard to tell the actual amount of dollars in circulation due to black market trade of the unit.
“It is not possible to establish the exact amount of foreign currency in circulation partly because of the informal trading,” Alupo says.
But Ggoobi believes there has been a steady growth of dollar transactions, especially at times when the shilling is much volatile.

“Although we currently lack empirical evidence, there is reasonable on-the-ground-evidence that a sizable level of transactions is now carried out in dollars. Undoubtedly, the process of currency substitution is on and will rise with the ongoing rapid depreciation of the shilling and the expected inflation,” he says.
The central bank’s argument has often been that this is a free-market economy, which explains the liberalisation of the currency.

In doing so, forces of demand and supply determine the movement of the shilling. But such movements have recently become defective amid reducing dollar inflows.
However, since the start of the year, the central bank has been intervening in the currency market to tame the rapid fall of the shilling by selling more dollar to forex traders.
In other words, the market has not been self-regulating, considering banks have been stocking up and sucking up dollars sold by the central bank.

Worrying currency trends
The speed at which the shilling is depreciating is worrying and might in the longer term cause problems for the currency.
The unit continues to shed heavily against the dollar but more worrying is it has in recent days been losing against other major currencies including the euro and the pound.
Analysts says investors might be losing confidence in the shilling thus pegging their charges on the dollar.

Risky economic model

According to Ramathan Ggoobi, government chose a very risky model - the unfettered liberal economic model, to manage our economy.
Although economic liberalism - with its emphasis on free markets and private sector domination, is today’s dominant economic doctrine, its application is what matters. Asian economies, according to Ggoobi, adopted liberal markets but pragmatically - with measured chance of success, gradually and with a careful blend with mercantilism, which has a healthy relationship between the state and the economy, which has seen such economies succeed where others have failed.
Equally traders, through their lose association, Kacita, think government has not helped to insulate them against the continued escalation of the cost of doing business, which as they say has become a form of exploitation, thus hampering growth of their businesses.
They also wonder how basic business enablers such as rent have been left to escalate because not considering a perennial high rate of business failure.

Additional Reporting by Jonathan Adengo

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