Surprised? Don’t be. Mutebile was admitting the obvious.

“The problem of appreciating private sector constraints is reinforced by these institutions being dominated by people who have never run their own business, let alone exported a product” Andrew Rugasira (A Good African Story)

 

In February 2014, the Uganda Shilling began a downward trend against the US Dollar. At the time, the sentiments were driven by signing of the Anti-Homosexuality Law that the president had assented to. The donors at the time had threatened to close the taps on aid due to the passing of this law. That was then. The law was annulled by a ruling in court. However, that did not stop the complete battering of the Uganda Shilling. At some point, the Financial Times had a story with the headline “Uganda Shilling gets a shelling.” That shelling has not stopped and last week, Governor of the Bank of Uganda (BOU) Prof. Emmanuel Tumusiime-Mutebile admitted there not much he could do to control the depreciation.

“It is not sustainable for the Bank of Uganda to try and prop up the exchange rate, at levels which are not consistent with supply and demand in the foreign exchange market, by intervening and selling foreign currency. The BOU would simply deplete its foreign exchange reserves if it attempted to do this.”

This shouldn’t come as a surprise though. When the Shilling started depreciating a year ago, the Central Bank maintained a wait-and-see approach. The depreciation was then referred to as a correction. A correction from the gains made in 2013 and part of 2014. What the Central Bank does not mention is that when the shilling depreciates, it never gets back to the original position. More notably, in the last 10 years, the trend is telling that the economy never seems to recover from those shocks.

The UGX vs Dollar trend in the last 10 years. When the dollar goes up, it stays up

The UGX vs Dollar trend in the last 10 years. When the dollar goes up, it stays up

 

That said, when Prof. Mutebile admitted that the reserves would be depleted if he intervened, some said he had given up so fast and sent the wrong signals to the market.

That is not entirely true. The markets knew this would happen and for a long period, they’ve been betting against the Uganda Shilling.

“Rates on Ugandan debt instruments have been climbing in recent months on worries government spending will likely escalate ahead of general elections due early next year,” Reuters reported in January 2015.

On 8th January 2015, the central bank admitted some people were betting against further depreciation. It is like they knew BOU could do nothing.

“Whereas the US dollar continues to strengthen globally and local demand for dollars with the resumption of business continues to pick up after the festive season, the Bank of Uganda has noted some speculative tendencies that have exacerbated the depreciation of the Uganda shilling.” Mutebile said at the time.

Notably on the question of reserves, this has been written several times that the central bank is building them up to have an import cover of over 4 months. In fact each time BOU would intervene to slow the depreciation, it would also come back to buy dollars. This seemingly – and rather – counterproductive measure was a signal enough to the markets that the dollar was in demand. This was further emphasized by Hon. Matia Kasaija in the Budget Speech 2015/16 when he fell short of mentioning short-term measures to halt the depreciation. All he did was acknowledge that BOU would continue to intervene where necessary.

“In order to reduce exchange rate volatility, the Bank of Uganda has been intervening in the foreign exchange market, although not to determine its level.”

In fact ever since the budget speech, the Shilling tumbled further from Shs3200 to above the Shs3400 mark as I write this. Whatever BOU did intervene, it was gobbled up by the market. The shilling would stabilize – here I mean it would remain the same – for a few days or even hours and then it would head back upwards.

In the international markets, we have been seeing the strengthening dollar hitting all other currencies hard: From Japan to Europe to Kenya and South Africa among others. Mutebile in his statement says;

“The Tanzanian Shilling fell by 20 percent, the South African Rand by 15 percent and the Kenyan Shilling by 13 percent in 2014/15. Even major international currencies fell heavily against the dollar in this period; the Euro and the Japanese Yen fell by 22 and 21 percent respectively.”

We are not Japan though. We do not export that much. So yes, we getting battered because of globalization. Hidden in that detail is the fact that the Uganda Shilling has weakened against the Pound and Euro (these are currencies getting battered by the Dollar too).

The problem is that we have been in slumber land for long. We are net importers. In 2014/15 the gap between our imports & exports widened to $2.9bn.  From toothpicks, to honey to textiles to rice to labor to cosmetics – name it all – we import. Our local producers compete with international products on this turf for the same market. And what shouldn’t surprise you is that we often refer to Ugandan products as poor and not up-to-standard.

We prefer Earl Grey tea to Garden Tea. The local textile market is in limbo, but our second-hand clothes shopping bonanza never ends. Our coffee makers struggle to get you to consume local coffee – some it is really bad, poorly ground – but then Nescafe booms. The steel manufacturers import some inputs that push up prices of the final products when the dollar surges. Not forgetting the real estate sector that pegs all its payments in dollars.

In as much as there is talk – like we did not see it coming – to boost exports, this conversation comes at the wrong time. A time when we are in an election period where it is all about perceptions. The market knows you’re all excited about Besigye, Mbabazi, and President Museveni. This excitement brings back the déjà vu feeling of 2011 when Mutebile says he was misled into financing the elections. (Borrowed on behalf of government). The perception is in the market and no matter how much Mutebile intervenes, this will not take away the perception about the election spending.

Also, before you jump to the whole exports bandwagon, note that the global market is no fair ground. The trade policies are unfair.

 “…But all these mean nothing if African exporters cannot access high-value markets for their finished products. The most significant challenge to the export led growth strategy is the limited access that’ Africa’s few exporters have to foreign markets and the very nature of markets themselves,” Andrew Rugasira writes in a A Good African Story.

For products like ours there is high-level standardization required. In other words, they do not trust us. For instance, we are currently on a self-imposed ban of exports to Europe. The trade ministry decided that this ban was necessary to avoid sanctions against Ugandan goods. But that is not the problem too. We have the so-called AGOA – we export to the USA free (no such thing as a free lunch). The benefits? Zilch. I guess we are fooling no one if we expect to export by just saying “hey look, boost your exports. Take advantage of the strong dollar.” We’ve been in this situation for more than 29 years. In six months or less it can’t be reversed. The best we can do is brace for a bumpy ride.

 

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