Tuesday July 10 2018

Weak Shilling: Why you should care

Traders off load goods

Traders off load goods from trucks down town in Kampala last week. According to economists, a weak Shilling drives prices of goods and services northwards. PHOTO BY KELVIN ATUHAIRE 

By Dorothy Nakaweesi & Christine Kasemiire

Some Ugandans prefer playing dumb to what goes on around them to joining the topical conversation.
For instance, you will be dumb struck if you analyse the kind of conversations dominating some social media platforms and main stream media.
It will be hard to hear a lone voice minding about the increasingly weak currency – shilling - that we have in our midst.
In fact, most people will pay no particular attention but will ask the shopkeeper why they have increased the price of sugar, which just a few days ago, they bought at a much less price.

Lost value
For instance, the Shilling has lost value by about 7 per cent since the year begun, becoming the worst performing unit in East Africa.
The Kenya Shilling has gained value, centrally to the Tanzania shilling and the Rwanda franca, that have lost by 3.6 per cent and 1.8 per cent, respectively in the same period.
However, some Ugandans have no idea about what is happening.

Trend of Shilling
The shilling is now trading in the range 3850/3860 against the dollar, which means that goods will be more expensive than they were at the same time last year.
This, among other reasons, is why you should interest yourself about the trend of the Shilling.
To show the effect of the shilling losing value, look at the Shs50 coin. A few years ago, it would buy you something. Not anymore. It has become worthless and its cousin – the Shs100 coin, I should say, is following in the same footsteps.
At least Shs200 now has some value because government decided to slap Ugandans with the new social media tax.

Uganda imports more than it exports, which in essence makes the country a net-importer. This makes us spend more dollars than we earn as importers take the bulk the few available dollars.
This means the balance of trade is sharply in the negatives. In 2018, the country registered a trade deficit of $320m (Shs1.2 trillion).
Ironically, Uganda had a negative balance of trade which in 1993 averaged at $146m (Shs562b) in favour of exports.
But when did the rain start beating us with an increasingly volatile currency that has influenced the prices of goods?

Industrialisation dream
According to Everest Kayondo, the Kampala City Traders Association-(Kacita) chairman, the failure to industrialise has been a major factor as the country has to depend on imports that come in at a relatively high price.
Kacita has a membership of more than 200,000 members, majority of which deal in imported merchandise.
“Most of our merchandise is imported and this is done using dollars [yet our primary trading currency is the shilling which is affected by the] exchange component,” he says.

Traders’ dilemma
For instance, he says, a trader will sell his goods in shillings but will have to buy dollars to travel, perhaps to China, to replenish stock, which cost value has to feed into the end user product.
“Currently, you will purchase less dollars than what purchased a few months ago or you need more shilling to purchase the same amount of dollars like previously” he says.
This in effect has forced traders to increase the cost goods such as sugar.
Sugar is manufactured here but most of the attendant inputs such as petroleum products to run the machines or packaging, among others are imported.
The effect of taxation has also influenced prices much as the current price hikes are a result of speculation.
Government last week started implementing new tax measures. But it would be unlikely that the current taxes played into the stock they currently have.
That effect could, perhaps, be felt in the next one or two months.
Similarly, a depreciating shilling is a nightmare for manufacturers, given that they import much of their inputs.
Uganda’s industrial production is mainly comprised of sugar processing, brewing, tobacco, cotton textiles, cement and steel production, which are heavily dependent on imported inputs.

This, according to Daniel Birungi, the Uganda Manufacturers’ Association, chief executive officer, makes manufacturers keen watchers of events that surround currency depreciation.
“Manufacturers are now spending more shillings to buy the dollars. As a result, price increments will be introduced and eventually passed onto the final consumer,” he says.
Secondly, Birungi says the rate is factored into the cost of other inputs such as fuel and electricity, which makes increases the cost of business.

Impact on economy
Beyond this, currency depreciation is a big threat to economic performance, as it has the potential to influence imported inflation.
This in the longer term, just like in Uganda’s case, creates an unpredictable business environment.
“Manufacturers [in such circumstances [have to be very resilient to survive. Because the effects have a serious bearing on business growth,” he says.
As such, Birungi says consumers in such circumstances must be prepared to pay more if prices escalate.
“The cost must be shared squarely because if the manufacturers takes it in, they might have to close,” he says.
However, such times are bumper seasons for exporters, who certainly pick more money from their exports.
In effect, exporters will get more Shilling for the same dollars although they might be put off by the expenditure cycle since they purchase goods from the same market.

For instance coffee exporters, roasters and processors have benefited from the current shortfall though minimally.
The impact of a depreciating shilling is a big concern. Makerere University economics lecturer Fred Muhumuza, says weak shilling drives prices of goods and services northwards.
Such a situation, he says, is more dangerous for importers since they need more shillings to buy dollars in order buy goods, which consumers might decline to buy due to high prices.
“I see June inflation has gone up. This has been a combination of factors which include food prices, energy, fuel and utilities,” he says.
All these factors have a dollar fact somewhere, they have forced inflation to increase from 1.7 per cent in May to 2.2 per cent in June.
For instance, fuel prices, especially petrol, have already hit Shs4,230 while diesel has touched Shs3,940. This represents a Shs600 increase since the beginning of the year.

The weak shilling

Fuel and Shilling
Two main factors are responsible for the fuel price hike. The global oil price – the price at which oil is sold before it is refined into petrol and diesel – which has been rising. The second factor is the depreciation of the Uganda Shilling. Uganda being landlocked and yet-to-be an oil producer means that it is a net importer of fuel.
The Uganda Shilling plays a significant role in ensuring fuel gets to several fuel stations in the country. Fuel is bought in dollars by the retailers from the Middle East, through the port of Mombasa before it gets to Uganda.

What depreciation means
The trend in the Uganda Shilling means retailers need more Shillings to buy the same quantity of fuel they had been buying in 2017. For instance, in 2017, Ugandans were buying petrol at Shs3,500 for a litre. For the same litre, they now need Shs4,230.

Hitting Shs4,000 mark
The Shilling which closed last week in the range 3,850/3,860, could soon hit the Shs4,000 mark given the speed at which it losing against major currencies.
The shilling has also been put under pressure by a continued weak balance of payment that has been characterised by increasing imports against an almost stagnant export market.

How importers cope with depreciating shilling
It is eight o’clock in the morning. Heavy laden trucks of merchandise make their entrance through the narrow trading area of Kikuubo lane in this one-stop centre.
Trucks make their way to the top leaving most of the entrance free for the runners to catch trucks to off-load and make a living.
By 10 o’clock, the rush cascades slowly to diminution later at midday. Off-loaders sit around the pavements lurking for a chapatti and tea served by entrepreneurial ladies at Shs1,000.

The off loaders sip tea while waiting for their pay. But these men whose bodies are their capital, assets, liabilities and taxes have had their jobs reduced as the amount of imports falls with the drowning shilling to the dollar, one of the off loaders says.
Mr Osman Roble, an importer of cosmetics and diapers from Tanzania’s Tanga Port, is baffled by the fluctuations in the dollar prices. Contrary to those affected by the drop in the value of the shilling, fluctuations, Mr Osman says, make price determination a challenge especially with understanding the market.

“The biggest problem is we cannot increase the price of products all the time. If we increase as much as the impact of the dollar, customers would not understand it. We reduced the quantity of products we import because it is costly for us, we make losses,” he says.
Even when there is a dismal increase in price, Ugandans struggle to afford. For instance, a carton of diapers was increased from Shs100,000 to Shs103,000 but customers will leave or ask for a discount.
Fellow importer, Mr Buule Siraje of Chappa General Merchandise, reiterates a challenge of the depreciation of the shilling to the dollar albeit, in a different sector.

While baking powder and prestige products are different from cosmetics, they suffer the same problems.
Since the cost cannot be sent to the final consumer at all times, the business remains a cost to cost business, with a little profit margin.
“With the fluctuations of the dollar and not being able to predict commodities’ new market price, we have to cut the five containers of imports to only three,” he says.
Existence of product substitutes leaves little to save Chappa since the demand now digresses to the much stable products usually locally manufactured.

dnakaweesi@ug.nationmedia.com

advertisement