Dollar rise is good for Uganda’s agriculture

Walking behind a young couple in the supermarket aisle, I could not help but eavesdrop on their conversation. They debated about what to or not to buy.

Their frustration was on the increased prices of their favourite Pakistani rice, canned beans and American Garden peanut paste.

Upon realising that the products they complained about are imported, I traced the probable cause to rapid appreciation of the dollar.
In August 2014, a dollar was trading at Shs2,600. As of August 28, 2015, a dollar was at Shs3,640. This is a 28 per cent rise in a year.

Compare this with the exchange rates of the preceding year. A dollar exchanged for Shs2,588 in August 2013 reflecting a 0.46 per cent change over a similar period ending August 2014.

However, the biggest slump of the Shilling lately was experienced from May to August 2015. A change of 18 per cent was registered with the Shilling crossing the “psychological” Shs3,000 barrier in May and is now hovering at Shs3,600.

There have been many complaints in the mainstream and social media about how the Shilling is performing and how it is likely to negatively impact the economy. One comment sarcastically suggested the country consider going back to using cowrie shells as currency.

The status quo
While I do agree that most of our businesses, which are inclined to importation of products and, sometimes, services are hard hit, I have always been a critic of the “Dubai” economy. That is, one that depends on purchasing products abroad and selling them locally, which is what that ours has turned into.

It is important that as a country, we have enough to produce and consume locally while exporting any surplus thereby keeping our imports to a bare minimum.

So, while most middle class consumers, like the couple I overheard in the supermarket, may complain and throw barbs at government for letting the Shilling slip, the status quo has the potential to benefit the agriculture sector immensely.

Why is the dollar a concern?
It means that if I have to purchase any item or service from abroad and import it into Uganda, I have to pay more for the dollars compared to a year or even just six months ago.
A can of honey from US, which costs $10, was the equivalent of Shs26,000 a year ago. Today, the same can is Shs36,400.
To that, factor in taxes and you have an unprecedented rise in the retail price of that can. This is the reason why product importers are complaining.

On the flip side, Onzivua (not real name), a honey processor from West Nile, whose inputs are all locally acquired, has not experienced a big change in costs of production. His interaction with the dollar is minimal.

The rise in the cost of imported honey is likely to drive more middle class consumers to consider purchasing Onzivua’s product.

If he proceeds to export his produce, Onzivua is likely to earn more from sales. A consignment of $10,000 that gave him Shs26m a year ago, today guarantees him the equivalent of Shs36m.
Declining contribution

Contribution of the agricultural sector to Uganda’s Gross Domestic Product (GDP) was 33.3 per cent in 2005. It has since dropped to 21.9 per cent. This has been partly attributed to a decline in crop prices, concentration on low-value crops, limited access to food processing technology, among others.

The plight of farmers’ incomes is there to see for anyone who cares to dig deeper. Stories abound of farmers growing crops, harvesting and being paid peanuts for their produce. Imagine maize going for Shs450 per kilo or rice at Shs1,400 per kilo even after the toil that these farmers go through.
The dip in farm-gate prices is usually attributed to product abundance during the harvest season.

However, there are a couple of other factors that lead to this. They include poor market access, lack of value addition, competition from imported alternatives and limited market size.
Due to skewed government policies, there are various imported alternatives to locally produced products.

This is evidenced by the range of imported foods gracing our supermarket shelves like rice, juices, honey, snacks, cheese, spices, fish, to mention but a few.

Their availability at affordable prices has always stifled possibility of growth in local production and processing. Several of these products enjoy subsidies in their countries of origin hence their ability to cost much less.

An example of rice
Using rice as an example, at my neighbourhood shop, six months ago, I could buy a kilo of imported Pakistani rice at Shs3,000.
What baffled me was that at this price, it competed favourably with the locally grown Super Rice, which is known for its nice aroma.

Due to the branding associated with Pakistani rice and relatively superior processing, consumers are likely to opt for the imported alternative.

Since the dollar began appreciating against the Shilling, I can hardly find Pakistani rice in the neighbourhood shops.
A quick inquiry from the shopkeepers revealed that they stopped stocking it due to its increased price.

Interestingly, the local rice alternatives are much more available today and even costing more than they did months ago.

Silver lining
My inquisitiveness led me to Butaleja District, a major rice-growing area. From my interactions with rice farmers, I found out that they were enjoying higher prices for their produce.
In December 2014, a kilo of Kayiso rice was Shs1,400. However, by July 2015, farmers were enjoying prices in the range of Shs2,200 per kilo.

People like me thought this was a temporary rise that would experience a drop when the harvest season sets in.
To my disappointment (or is it joy?), it does not seem like the prices are going to drop. This has partially been attributed to the increased demand for local rice by traders following a reduction in imports from the Asian countries.

In that regard, every cloud has a silver lining. We could as well strike the opportunity this status-quo presents us with.

The likely benefits
Increased demand for local produce: We cannot deny the fact that consumption by the middle class is crucial to sustaining the economy of which agriculture is a key sector.

A deeper analysis of the household final consumption expenditure (defined as the market value of all goods and services purchased by households) in Uganda reveals its inclination towards imports largely. The increasing cost of the dollar is likely to force many to seek local consumption alternatives.

Increased prices: Increased demand with limited product supply in the short run leads to an increase in prices. This has always been the dream of many participants in the agriculture value chain especially the farmers.
The example on the rice value chain (in the main article) is testimony to this.

In the long run, however, the increased prices are likely to stimulate further investment in the sector thereby boosting production. This eventually leads to sufficient supply of local market needs.

Growth in the local agro-processing industry: Market demands tend to force changes in the supply chain. Most urban dwellers that patronise imported products tend to criticise local alternatives from the perspective of quality, availability and user friendliness. These are all largely addressed by processing.

Increased prices and demand for local products is likely to spur further investment in agro-processing in order to meet the ever sophisticated demands of the middle class market.
A case in point is the potato chips factory that was launched in Kisoro in January 2015 with the aim of processing the abundant Irish potatoes into chips for further supply to restaurants, hotels and even for export.

Due to the increasing demand for French fries locally and regionally, this venture was initiatied by a local businessman in conjunction with farmers’ group.

Improved export potential: Any situation that favours one to get more local currency from the dollar is always a blessing to exporters.

The more money one can potentially earn by sending products out of the country, the more they are encouraged to engage in the export business.

The agricultural sector has a great opportunity to contribute to the growth of the country’s exports thereby improving on the national Balance of Payment status.

The writer is an agribusiness and ICT consultant. Follow @wirejames