Weak shilling slows growth in 2018

Friday January 4 2019

The shilling heavily lost against the dollar

The shilling heavily lost against the dollar both in the first and second quarter of 2018. PHOTO BY EDGAR R BATTE  

By Dorothy Nakaweesi & Paul Murungi

The shilling rolled into the New Year with relative stability having had a rough 2018.
At some point, the unit threatened to hit the Shs4,000 mark as it experienced stiffened volatility in the second half of the 2018.
The shilling had opened the year with relative uncertainty but stablised before losing again in the second half of the year due to the strengthening of the dollar.
The lost against the dollar and other major currencies before recovering some ground in the last half of the year closing at a market average of Shs3,710.
In June, July, August and September, according to available data, the shilling experienced one of its toughest periods - the worst since 2016 when the unit touched the 3900 mark.
According to Fred Muhumuza, an economics lecturer at Makerere University: “Overall, the shilling was weaker in 2018 compared to the last two years – 2016 and 2017”.
“It has been above the Shs3,700 mark since April 2018,” he says, arguing that it will need some hard work from the Central Bank to regain further.
On trade-weighted basis, the shilling appreciated by only 1.8 per cent in 2018 compared to 4.9 per cent in 2017.
However, Adam Mugume, the Bank of Uganda director for research argues that the local unit was relatively stable, considering that events in the global market were more volatile.
For instance, he says, large markets such as the US normalised their monetary policies thus impacting the stability of global financial instruments such as the shilling.
Currency depreciation, as it had been expected, threatened the economy forcing through inflationary pressures that were seen increasing in the second half of the year.
This was as a result of imported inflation driven by rising prices of imports.
There was an increase in core inflation from around June 2018 attributed to depreciation of the shilling.
Subsequently, Bank of Uganda was forced to increase or maintain the Central Bank Rate from 9 per cent to 10 per cent in October as it sought to stabilise the unit.
“The increase made it more costly to borrow and hence will have a dampening effect on investment and economic growth,” Muhumuza said, adding that this will in the long term create an erratic business environment.
This, according to Uganda Manufacturers’ Association, has a chilling effect on manufacturers and if they are not resilient they might end up making losses or closing.
However, in the same measure, consumers were found on the losing side as they had to dig deeper to pay relatively higher prices.
For instance, the events in the foreign exchange market affected the fuel market as prices rose drastically to nearly Shs4,500 for petrol in the last quarter of the year.
Diesel rose to Shs4,180, a price that experts said, would have a long term effect on the economy.
Imports remained resilient except for minimal shocks in the first quarter of 2018 when depreciation was rapid. In the period, imports slightly declined from $2.021b in the fourth quarter of 2017 to $1.9b in the first quarter of 2018.
“Al though the decline could have been seasonal and characteristic of [first quarters], we cannot rule out the impact of the depreciation of the shilling,” Muhumuza said.
Huzaifah Ssekajugo, an electronics and car spare parts importer, said 2018 had been a tough year for importers.
“There was a reduction in [sales] as customers were reluctant to buy because of increased prices,” he said.
However, on the side of exporters, it was bumper harvest as such events come with increased dollar inflow.
For instance, exporters get more shilling for the same dollars. However, much of that could have been spent on other services whose prices have been affected by the strong dollar.
Coffee exporters, roasters and processors could have been the main beneficiaries of the strong dollar.
Equally, the tour and travel business, according to Jowet Matsiko, experienced good returns as a result of the strong dollar.

Strengthening shilling

To salvage the shillings, Muhumuza says, government must seek ways through which it can sustainably strengthen exports.
“Exports have been growing but not as fast as imports. As a long-term strategy, we need to strengthen agricultural production, tourism and remittances, which are some of the leading sources of foreign exchange,” he says.
Similarly, according to Prof Augustus Nuwagaba, an economist at Reev Consult, the shilling can only stay strong if it is supported by a strong export market.
“If there is an increase in export earnings, we shall have an appreciation in the value of the shilling. However, our exports have unfavorable terms of trade because we export them in raw form, which carries less value,” he says.
Beyond this, foreign exchange reserves must adequately be liquid to enable the Central Bank intervene in the foreign exchange market when the shilling is under pressure.
“This is key, especially in cases, where the pressure is generated by external factors such as increased interest rates in the US,” Nuwagaba says.