Why the shilling will not recover soon

Stanbic bank, Uganda’s largest bank owned by a South African company Standard bank posted a profit of 135 billion shillings. Of course compared to MTN, there is no story to write home about. For the Ugandan economy, there is something to worry about. Another dip for the shilling. By the time Stanbic bank, Barclays bank, Standard Chartered and many others finish the process of reporting and expatriating profits, the shilling will still be in deep trouble. 

The exchange rate as I have remarked elsewhere is a rate at which one currency exchanges for another and this is determined by what these countries exchange with one another. In this case we are talking about the imports and exports of the respective countries. Of course this is solved worldwide by pegging small currencies to one major international currency in this case the dollar. For most of the countries in the world as you conduct your international trade activities, the medium is the dollar. Besides this, the policies of a country do influence the exchange rate. Uganda’s economic policy has evolved around liberalization of the economy including the capital account, our currency is traded freely. You can bring in and take out as much dollars as you can. On the trade, Uganda has nothing much to trade because it does not produce much for export, therefore its exchange rate can never be favourable. If you have nothing to trade, at least you should be able to attract tourists, these will bring in dollars. Our tourist operators do not have the efficiency required to handle tourists well and besides it’s not easy to attract tourists into our countries courtesy of the developed countries. Any small activity in Africa is taken out of proportion. We therefore can’t earn as would be expected. You can blame it on lack of adverts or strategy but it can’t beat the developed world in blocking the visitors coming to Africa. It’s a place with wars, diseases and corruption. On the actual trade, the position is even worse, the lead article in the current Economist talks about how China will continue to dominate the world markets as a world factory, they also indicate that Africa has been blocked by Europe in trade. 

Africa cannot send goods to Europe because of a host of variables even where it has a comparative and or competitive advantage like coffee, tea. It still cannot export them to Europe for good value. Africa is therefore doomed to poverty. Museveni has been on record asking the developed countries to allow Africa export to them. Europe has never heeded this request. The same countries are telling Africa, it must develop, this is your century, something must happen in Africa. All this is rhetoric. But are there no solutions to Africa’s dilemma. I see four things 

One: more trade with one another

Two: increasing competitiveness in this regional trade

Three: more research in science especially in areas where we trade

And finally an Africa that can say no to policies that are anti-Africa especially asking Africa to liberalize its markets while its rich trading partners have closed out African products from their markets.

Why the Uganda shilling is losing its value

I was explaining to a group of students why the shilling was losing value and they wondered why I was not the Minister of Finance. I said to them it is easier to explain than to actually evolve policies and execute them. In fact it is much easier to criticize and everybody will listen and applaud you. I recall when president Museveni had just taken power after the protracted war, a senior colleague in Makerere used to criticize Museveni’s policies and it landed him a position of a commissioner of tax in the ministry of finance. When he got there, he didn’t do well. It was a lesson for some of us who were criticizing government that it is easier said than done but the reality is that the shilling has taken a pounding in the last few months. The most recent came when MTN de4clared its profits of four hundred billion shillings. Of course MTN is a South African company and they have to repatriate their profits. Uganda’s currency is fully convertible and MTN does not have to seek permission to transfer money. However its actions send shivers through the country’s financial system 

With a fully convertible currency like the Uganda shilling, capital flows in and out without any restrictions. The convertibility of the currency is simply one of the causes of the depreciation of the shilling. MTN went out to look for the money, demand was high, supply was low and hence the depreciation of the shilling. You had to come up with more Uganda shillings to buy dollars. This is a problem on the demand side

Additional problems on the demand side are Uganda does not produce items for its own consumption, it imports, you will be ashamed if you went into a supermarket and realize other than bread which too is made out of imported wheat, sugar and milk. The rest of the items are imported. It is surprising to learn that I came across paw paws from Brazil and yet Uganda is said to be an agricultural country

Besides these consumer products, we import consumer durables, motor vehicles, arms and heavy machinery. This means that we ourselves put pressure on the shilling. 

The issue of demand and supply is a bit confusing especially in these circumstances but to put it in a plain manner, Uganda has no competitive products it produces and exports. Today, the largest component of our export earnings come from kyeyo money. This is people working abroad and remitting money for us to use to import the products we want from abroad. It is not us producing. This is a shame.

The level of production in a country is generally low. Our productivity is low and so is our competitiveness. There are stories that Uganda produces good quality beans. However, if you look around for the quantity to export, you may send first consignment but you may not be able to sustain the export. The problem is low levels of production. That aside, even the cost of producing these beans compared to other countries which produce similar beans is very high.

We produce beans and other products using an ordinary hoe and depend on Mother Nature to provide the rain. This is true for beans, cotton and other products that we grow. I read about a farmer in The Us who has over 5000 acres of cotton. Amazing, is not it. Ugandan farmers don’t even plant an acre. How can they compete?

Exchange rate as the word literally means is the rate at which you exchange one thing for another. A dollar for a shilling for instance. For those countries like Uganda which have nothing to sell, there currency tends not to have much value. If you have nothing to produce and sell, those who have will call the shots. Our neighbours Kenya is the economic power house in the region, they have lots to sell in the region. Don’t be surprised if they freak out of the East African monetary union. If they go in, they will be like Germany but unlike Germany, they cannot afford to shock absorb the problems of other countries. There have been challenges between Kenya and Tanzania over the airline and other things. The reason is simple, Kenya will lose if the agreed to what Tanzania wants and yet politically if we are to improve the wealth in the region, Kenya has to do what its neighbours want. It will cost them in the short run but in the long run they will be the biggest beneficiaries of a strong economy

For the Uganda shillings, the worst is yet to come, for as long as the economy doesn’t produce much for export and has this liberal policy on convertibility of the shilling, the shilling will continue to depreciate. Uganda’s need to wake up and produce large quantities of high quality products for export. We must improve what is in the shelves of our super markets with Ugandan products. Strategy and policy will determine this.