Thursday March 1 2018

Shilling’s good run against dollar ends

Shilling continues to absorb renewed pressure from a strong dollar

Transaction. A trader counts his money. The Shilling continues to absorb renewed pressure from a strong dollar. FILE PHOTO  

By Dorothy Nakaweesi & Rainer Ojon


The short-lived Shilling appreciation Ugandans enjoyed during the festive period on the account of foreign remittances is over.
The exchange rate challenge is back as the Shilling depreciates. Lately walking into the forex bureau to buy or sell your dollars, you incur an extra Shs40/50.
The Shilling continues to absorb renewed pressure from a strong dollar, depreciating by a spread of up to Shs50 within the last two weeks alone.
There has been no intervention from the central bank on either the supply or purchase side in the money market where a record minimum of $10m are transacted each day by both commercial banks and forex dealers, according to sector players.
“What we are seeing in the market is the pressure from the US Dollar, Pound, Euro and the Kenya Shilling on the local currency. There are limited inflows but large demand. No mopping from the Bank of Uganda,” Mr Stephen Kaboyo, the lead partner at Alpha Capital –a forex trading company, says.

The dangers
He, however, adds that there is a lull in the depreciation pressures now. “The Shilling has so far stabilised with depreciation pressures seen late last week easing,” Mr Kaboyo says.
This can be attributed to a combination of commodities inflows, subdued demand and end of month non-governmental organisation (NGO) flows.
Kaboyo thinks the local unit will likely remain within the current levels of 3,640/3,650, which is still weak compared to its strengthening spree it last exhibited in October last year trading in the levels of 3,588/3,598.
According to some players, there is uncertainty between buyers and sellers because while the general feeling is of depreciation, the Shilling can hold its grounds against the US dollar for days at a time.
“We usually handle about 1,200 customers daily both sending and receiving money from different parts of the world. But this number is reducing because for some it is wait and see where the exchange rate is falling on that day,” Ms Madina Najuuma, a manager at Dahabshiil, a money transfer outlet, says.
The wider implications of a depreciating Shilling is equally on fuel imports, whose pump prices are equally soaring past the Shs4,000 mark per litre, a spike of nearly Shs200 per litre from Shs3,800 on average as of January this year.

Effects on fuel prices
VIVO Energy’s chief executive officer, Mr Gilbert Asii, says the spikes on pump prices, in part has to do with the country’s exchange rate against leading currencies such as the dollar.
Experts say because the country’s export base is extremely crippled on diversification, volumes and standards. We are fetching minimal values on account of this.
More so internally the country does not seem to be focusing on those sectors that would predominantly account for the export receipts.
“Instead more resources are being directed in consumption spending, lost in corruption or put into developing hard infrastructure. But we do not see large chunks of resources into product development and supporting the tradable sectors, especially agriculture and tourism,” Mr Gideon Badagawa, the executive director of Private Sector Foundation Uganda, says.
Badagawa says sadly government has opted to borrowing domestically to pay salaries and if it is done, it may make the situation worse.
“The private sector cannot borrow to fund export oriented investments because of this. Government must find a lasting solution here even if it meant downsizing. The private sector can’t do this,” he notes.

Impact on economy
Mr Fred Muhumuza, an economist and Makerere University lecturer, thinks that the Shilling depreciation will certainly put an upward pressure on all products that are imported and those that use imported inputs.
“We will also see some general upward pressure due to increase in fuel prices that affect transport prices,” He shares.
However, Mr Muhumuza does not expect the fuel price to have a big impact as the transporters and traders might absorb part of the impact given to the already stressed economy.
He says: “If they (transporters) put a big increase, it might affect their business as customers are already complaining of high prices.”

What is the way forward?

Experts say the depreciation of the Shilling is often part of the problem and the solution for it tends to sort out luxurious imports or whatever may not be very critical at that point in time.
“One way this situation may be mitigated is by those involved in construction of houses and related use of imported inputs to suspend operations,” Fred Muhumuza advises.
Exports mainly through human labour and agricultural products to the region, as well as gold could help, but the rest will not be offering much of a short-term solution.
Otherwise, the weakening of the dollar at global level and rising interest rates in America will surely put pressure and continue to weaken the Shilling.
“Some drivers of the dollar are beyond reach by an individual small country like Uganda, which must adjust by either increasing exports or reducing demand for imports,” Muhumuza concludes.
Mr Gideon Badagawa, in his view on the way forward says the government must develop export value chains through linkages.
“We need more public resources put in strategic investments that can spark off private sector appetite for laying capital here like post-harvest,” he adds.
“All funds (youth livelihood, agriculture credit facility, microfinance support, women empowerment) need to be consolidated into a more focused pool of resources to support export value chains,” Badagawa recommends.
Experts says government must fund public agencies that support exports and demand accountability from them.