Weakening shilling likely to spike product prices

Traders conduct business in Kikuubo, Kampala. If the shilling continues to maintain a weak stance consumers will spend more on purchases . Photo by Faiswal Kasirye

Here in Kikuubo, a Kampala business hub, people squeeze through narrow corridors as they struggle to catch up on their shopping.
It is yet another shopping day for household items, cosmetics and textiles, among others.
Here, informal trade blossoms but so do imports. With his chin tucked in his palms, Julius Ssendagire, a merchandise shop owner says the recent depreciation of the shilling has left them with no option but to increase prices of goods.
“If the dollar strengthens, our distributors increase prices. We then have to pass them onto to customers,” he says with a cynical smile, adding, “Distributors warned us that prices would increase at the start of 2015”.

Commodity prices inch up
A trader importing shoes from China, says he is hesitant to take on new stock because “customers don’t like price increments.”
The same cannot be said for parents buying scholastic materials. The price of a bic pen is now up from Shs400 to Shs500, according to some traders. But the largest increment has been on rulers with a box rising by almost 30 per cent to Shs260,000 from Shs200,000.
“The new school term started on Monday [last week], parents were here. Now Senior Five students are about to start school. We expect parents to come back,” Christine Nammuddu says.
For retail chains such as Uchumi Supermarkets, prices of fats and oils, soap, packaging bags, tissue and paper products have all gone up.
Ronnie Ochwo, the marketing coordinator Uchumi Supermarkets Uganda, says: “There is a fall in consumption due to change in prices of common goods like cereals, milk, juice and biscuits.”

But how did we get here?
Uganda imports more than it exports and, as a result, more money is channeled out than is brought in, which negatively affects the shilling.
For instance, in 2014 exports stood at $2.69b (Shs7.8 trillion), compared to $6.1b (Shs17.6 trillion) worth of imports, according to BoU.
The shilling opened the year on a low, breaching the Shs2,800 barrier, before sliding to Shs2,900 but later stabilised closing last week in the Shs2,850/60 range.
Bank of Uganda blames the depreciation on the strong demand for the dollar and strong recovery of the US economy.
But for tenants, warning shots have already been fired with market analysts indicating that increments in rent prices are just but inevitable.
In the construction sector, a change in prices has already been witnessed with this newspaper reporting last week that retail prices for cement across the country had risen from Shs28,500 to a market average of Shs29,500.
According to property listings website, Lamudi, 60 per cent of Uganda’s construction materials are imported. The effect of this, Shakib Nsubuga, the Lamudi country manager, says “Finished goods become expensive, especially for the average Ugandan whose earnings are in shillings.”
Additionally, Roofings’ inputs like coils used in the manufacture of iron bars and iron sheets which are imported have forced a spike in the price of iron sheets to between Shs29,000 and Shs61,000, depending on size.
Stuart Mwesigwa, the Roofings business development manager notes: “We procured material when the dollar was low. However, when it shot up, the costs we incur to replenish stocks are high.”
Samuel Mwesigwa Mafende, a general merchandise trader, is a tenant in a Kampala Down Town building where rent is billed in dollars.
“It is bad for us. Our income being in shillings means that we have to pay more on rent,” he says.
For instance, he says: “I pay $21,900 [for three months]. In October last year I paid Shs56m, however, this has risen to Shs63m.”
The sticky fuel prices
Fuel dealers blame the sluggish reduction in pump prices on the weak shilling even as global oil prices continue to tumble.
Here (Uganda), prices of fuel have been falling sluggishly, shedding about Shs300 since August.
However, Hans Paulsen, the Vivo Energy chief executive officer, says the market should be aware that their purchases are made in dollars but expenditures made in shillings which negatively impacts their product prices.
For instance, he says the shilling traded at Shs2,518 in May against the dollar but is currently at Shs2,870.

Power costs up
Last month, Electricity Regulatory Authority (ERA) announced an increment in power tariffs for the first quarter of 2015, saying there are fundamentals that have fed into the cost of producing electricity.
Tariffs are set based on global oil prices, the exchange rate, inflation and the generation mix. However, movements in exchange rates have largely influenced the revisions.
In 2014, ERA says the depreciation of the shilling alone increased costs in the power sector by almost Shs86b.
“It is important to note that the shilling depreciated at an unprecedented rate of 10.1 between November 2013 and November 2014. As a result, overall power sector costs rose,” a statement from ERA reads in part.
More troubling is that Uganda Electricity Transmission Company, which in the Power Purchase Agreements signed with generation companies, is expected to pay for power in dollars but on the other hand receives payment for power distributed in shillings.

How BoU has acted

When the shilling started rapidly losing against the dollar between November and December, Bank of Uganda (BoU) stayed away from the market.
However, analysts like Stephen Kaboyo of Alpha Capital questioned why BoU had not intervened, letting the dollar to ride freely.
In the first week of January, BoU blamed “speculative tendencies” for the depreciation, saying they would take measures to save the shilling from further collapse.
At around the same time the central bank intervened but the impact was only felt after a week with the unit moving from a high of Shs2,905 to the Shs2,850/55 range.
In January alone BoU intervened at least five times but also auctioned a 2-year Shs80b bond and a 10-year Shs100b bond as it sought to increase supply of dollars in the market.
BoU’s action, Christine Alupo, the director of communications, says sought to stem speculative tendencies in the market.
However, she adds other fundamental that have led to the strengthening of the dollar are still existent.