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Uganda has been in the middle of the storm in 2015, with the depreciating Shilling being the most visible manifestation of the country’s economic woes. Mark Keith Muhumuza & Dorothy Nakaweesi document the major events that shaped Uganda’s economy in the year.
One word that has resonated around the business environment in 2015 is the “Shilling.” The positives from the Shilling have been largely far-fetched unless one is a speculator, a landlord or perhaps, National Social Security Fund. The bulk of the effects of the Shilling have been negative as they have fed into consumer goods, both imported and locally produced, rental prices, interest rates, electricity prices, motor-vehicle prices and lending rates.
It also posed a challenge to policy makers at Bank of Uganda (BoU) and the Ministry of Finance, Planning and Economic Development. At the start of the year, the Shilling was already losing ground to all major currencies but more specifically the dollar. Right from the onset, BoU had stated that the Shilling was “correcting” after two years of appreciation. However, during the same period, BoU also warned there were speculators who were responsible for the fast-paced depreciation of the Uganda Shilling.
In the first week of January 2015, BoU issued a statement warning speculators.
“The speculation is emanating from imaginary expectations by certain economic agents regarding government projects such as Isimba power project whose FX [forex] funding was secured through loan agreements with Exim Bank of China… The assumed demand for FX by the government is simply speculation which has exacerbated USD demand,” the statement issued by BoU governor Emmanuel Tumusiime-Mutebile read at the start of the year.
The speculators, if the words of the governor were to be believed, did not stop betting against the Uganda Shilling. By mid-January 2015, the Shilling hit Shs2,900, a level last seen in October 2011. Each time BoU intervened to reduce what is termed as volatility, the reprieve lasted only about three days. The phrase used to describe the actions of BoU was “flogging a dead horse.” By March 2015, the rate was hitting record high as it breached the Shs3,000 mark.
The initial moves by BoU were to pump dollars in the market in order to provide the much-needed currency and control depreciation. As soon as BoU made dollars available, the rates fell but then in a few days, those dollars were already gobbled up. Notably, BoU would pump dollars in the market but also buy them back gradually to build under pressure foreign reserves. By July 2015, several interventions had been made to the tune of over $200 million (Shs676b).
As the dollar surged above Shs3,000, the BoU opted for a tool that would squeeze demand and slow lending to the private sector. The Monetary Policy Committee (MPC) recommended that the Central Bank Rate (CBR) be raised to reign in on inflation that was as a result of the depreciating Shilling.
The MPC did, indeed, act by increasing the CBR from 11 per cent to 12 per cent in April and to 13 per cent in June 2015.
The business community was already paying the price of higher rental charges and was about to find it hard to borrow money.
“It is bad for us. Our income being in Shillings means that we have to pay more on rent. I pay $21,900 [for three months].In October last year, I paid Shs56m, however, this has risen to Shs63m,” Mr Samuel Mwesigwa Mafende, a general merchandise trader, a tenant in a Kampala downtown building told Daily Monitor at the time.
As a result of the CBR rise, commercial banks did not wait for long to notify their customers that lending rates were going to rise. Indeed, they did. By June 2015, at least, 10 banks had notified customers that their lending rates would rise. A common excuse the banks used was “due to the existing market conditions, we have revised our prime lending rate.”
Lending rates surge
That still did not save the Shilling from near free-fall. By mid-July 2015, the Uganda Shilling was nearing the Shs3,700 mark and BoU intervened but the depreciation still remained about Shs3,000. This prompted BoU into an emergency meeting in July 2015 where the CBR was raised to 14.5 per cent. In the meetings that followed, the CBR rose to 16 per cent and 17 per cent. It is only in December 2015 that the rate stayed at 17 per cent.
One of the signs that the economy was struggling was revealed by Uganda’s top banker Patrick Mweheire, CEO Stanbic Bank Uganda in August 2015. Stanbic had just recorded a minuscule rise in net profits for the first half of 2015.
“Banking in this kind of environment is going to be hard,” he said, highlighting a sudden rise in lending rates, inflationary pressures, a volatile Shilling, rising interest on government debt, widening government expenditure and the elephant in the room, the 2016 elections.
“High profitability in 2012 was followed by an increase in non-performing loans, which persisted through to late 2014. Most banks had started recovering from those shocks, but they seem to be sliding back just like in 2011,” Mweheire said at the time. This, is in reference to the possibility of the rise in non-performing loans in the banking sector as interest rates rise. This is not yet visible in statistics from BoU. The BoU Monetary Policy Report released in December 2015 indicates that non-performing loans as of September 2015 were 3.8 per cent, down from 4 per cent in June 2015.
The bankers had also projected that they would slow down on lending by choosing carefully who they give money to. That is already being seen, according to the Monetary Policy Report.
“However, annual growth in Private Sector Credit (PSC) growth declined to 21.6 per cent in October 2015 from 24.7 per cent in August 2014 reflecting subdued exchange rate depreciation,” the report reads. This is the first recorded decline in PSC since the end of 2013.
The rise in lending rates was also heightened by the appetite for government debt on the domestic market where less risky returns rose. For bankers, they were lending to the government at 14.5 per cent for 91 days in July 2015. By December 2015, this rate had jumped to 19.5 per cent. This has happened to almost all other tenures.
Power tariffs rise
From the effects on lending, the Shilling led to further increments in the electricity tariffs. In the first three-quarters of the financial year, power tariffs rose by less than 2.5 per cent. This rise was far less than what it was supposed to be because of the price increment cap. However, when Umeme posted results, it made foreign exchange losses of Shs73b in the first half of the year, the Electricity Regulatory Authority (ERA) had to act.
Additionally, the sector was facing financing gaps of about Shs37b if the tariff had not been increased. In October 2015, ERA increased power tariffs by 17.4 per cent on average in order to cater for the Shilling depreciation. This was despite protests from the Uganda Manufacturers Association, who eventually had to concede and accept the tariff rise. The bulk of the power users in the economy are manufacturers and any change in tariffs feeds into production costs, which cost is eventually passed on to the consumer.
Notably, the highest inflation rate since August 2012 was recorded in November 2015 because of the power tariff rise. In November, inflation rose to 9.1 per cent, up from 8.8 per cent in October 2015. This factor explains what BoU termed as “pass-through effects” of the depreciating Shilling.
Sticky fuel prices
When the Shilling depreciates, the pressure to keep fuel prices low reduces. That has been a line towed by the market dealers. The fuel prices remained sticky even after crude oil prices were trimmed by more than half. Petrol prices briefly dropped to nearly Shs3,500 by July. That did not last. In fact, prices are at the same point they were in mid 2014.
The fuel dealers noted that the other factors – the Uganda Shilling and interest rates – were responsible for the price remaining sticky. For instance in October, Peter Ochieng of the Hashi Group told Daily Monitor that they used to get loans (foreign currency) at 7.8 per cent but this had grown to 11 per cent.
The Shilling had ripple effects on every business aspect in 2015. Being an import led economy, the business world passed all these effects to the consumer. For the policy makers at the Ministry of Finance, the option to boost exports cannot be achieved in the short term.
Recently, they submitted a request to borrow $200m (Shs676b) from the Preferential Trade Area Bank in order to provide foreign currency without depleting the foreign reserves at BoU.
It is no wonder that the economic activity and output have been revised downwards to 5 per cent from 5.8 per cent by BoU, IMF and World Bank.