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Fuel soars, shilling sinks, banks hunt for borrowers: How Ugandans can survive
Slower business activity can weaken household incomes and demand even further. And when demand weakens, businesses become even less willing to invest. That is the cycle Uganda must avoid, writes Dr Julius Othieno.
Dr Julius Othieno. (Courtesy)
By: Admin ., Journalist @New Vision
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OPINION
By Dr Julius Othieno
Ugandans are beginning to feel an economic squeeze that could become more painful if the current global shocks persist. At one end is the price of oil. At another is the weakening shilling.
In between is a private sector that appears increasingly reluctant to borrow and invest. These are not three separate problems. They are connected, and together they could make the cost of living, the cost of doing business and the cost of economic growth much higher. The warning from Saudi Aramco chief executive Amin Nasser should therefore not be dismissed as another distant geopolitical development.
Speaking at the Energy Intelligence Forum in London, Nasser warned that rebuilding global oil inventories depleted by disruptions around the Strait of Hormuz could take up to two years, even after the route reopens and market confidence returns.
For Uganda, which imports its petroleum products, prolonged disruption to global oil supplies matters enormously. Oil is not just about what motorists pay at the pump. Fuel is an input into almost every part of the economy. When fuel becomes more expensive, transporting food from farms to markets becomes more expensive.
Moving manufactured goods costs more. Public transport operators face higher operating costs. Farmers pay more to transport inputs and produce. Businesses spend more to distribute their products. Eventually, the additional cost finds its way into the household budget. That is why an oil shock thousands of kilometres away can become a food price problem in Kampala, a transport problem in Tororo and a business survival problem in Mbarara.
The second pressure is the exchange rate. The Ugandan shilling has recently crossed the psychologically important Shs4,000 mark against the US dollar. The implications extend well beyond importers. A weaker shilling means that Ugandans need more shillings to purchase goods and services priced in dollars. Fuel is one obvious example.
But the same applies to machinery, medicines, technology, industrial inputs and many other products on which households and businesses depend. The danger is therefore the combination of a higher dollar price for oil and a higher shilling price for the dollar itself. Even if the international price of a commodity remained unchanged, Ugandan consumers could still pay more because the currency used to purchase it has become more expensive. This is where the oil crisis and the currency crisis meet.
There is, however, a third pressure that may prove even more significant in determining whether the economy can withstand the first two. Ugandan businesses are becoming reluctant to borrow. According to figures reported by CEO East Africa, only 8.8 per cent of businesses applied for loans in the July–September quarter, down from 17.6 per cent previously. Only 4.4 per cent expect to borrow in the December quarter. That is a striking development. Banks need borrowers because lending is part of their core business. Businesses need finance to buy stock, acquire machinery, expand premises, employ workers and manage working capital. Yet we now have a situation in which banks may be willing to lend while businesses are increasingly unwilling to borrow because borrowing only makes sense when a business can reasonably expect the investment to generate enough income to repay the principal and interest.
If fuel costs are rising, imported inputs are becoming more expensive, consumers are cutting expenditure and the exchange rate is uncertain, a business owner may reasonably decide that preserving cash is safer than taking on additional debt.
The three pressures above become Uganda’s one economic problem.Higher oil prices increase operating costs. A weaker shilling increases the cost of imported inputs. Higher costs squeeze business margins. Uncertain demand makes businesses cautious. Cautious businesses borrow less. Lower borrowing can mean less investment. Less investment can mean slower expansion and fewer new jobs. Slower business activity can weaken household incomes and demand even further. And when demand weakens, businesses become even less willing to invest. That is the cycle Uganda must avoid.
For households, the first response should be preparation rather than panic. Families should assume that some prices may remain elevated for longer than expected and reorganise their budgets accordingly. Food, rent, school fees, transport and other essential expenditure should take priority over discretionary spending. The temptation during difficult economic periods is to borrow to preserve a lifestyle that income can no longer comfortably support. This can create a second crisis after the first one. Before taking a loan, households should ask a simple question: What will this money produce?
Borrowing for an income generating purpose is fundamentally different from borrowing to finance consumption. Households should also strengthen their savings buffers, even if the amount saved each month is small. A modest emergency fund can make the difference between surviving a temporary shock and having to resort to expensive emergency borrowing.
Businesses must protect cash. For businesses, cash-flow management could become more important than rapid expansion. A business can be profitable on paper and still collapse because it does not have enough cash to pay suppliers, workers, taxes and other immediate obligations. Businesses should therefore tighten collection of outstanding debts, negotiate reasonable payment periods with suppliers, avoid excessive stock and examine every major expense. Where possible, they should reduce unnecessary exposure to the dollar by sourcing inputs locally. This does not mean abandoning imports. It means asking whether every imported input is essential and whether a competitive local alternative exists. Businesses should also examine their pricing carefully.
Absorbing every increase in fuel, transport and imported inputs may eventually destroy margins. But passing every increase directly to consumers can also destroy demand. The answer is a balance between protecting margins and retaining customers.
But the same applies to machinery, medicines, technology, industrial inputs and many other products on which households and businesses depend. The danger is therefore the combination of a higher dollar price for oil and a higher shilling price for the dollar itself. Even if the international price of a commodity remained unchanged, Ugandan consumers could still pay more because the currency used to purchase it has become more expensive. This is where the oil crisis and the currency crisis meet.
There is, however, a third pressure that may prove even more significant in determining whether the economy can withstand the first two. Ugandan businesses are becoming reluctant to borrow. According to figures reported by CEO East Africa, only 8.8 per cent of businesses applied for loans in the July–September quarter, down from 17.6 per cent previously. Only 4.4 per cent expect to borrow in the December quarter. That is a striking development. Banks need borrowers because lending is part of their core business. Businesses need finance to buy stock, acquire machinery, expand premises, employ workers and manage working capital. Yet we now have a situation in which banks may be willing to lend while businesses are increasingly unwilling to borrow because borrowing only makes sense when a business can reasonably expect the investment to generate enough income to repay the principal and interest.
If fuel costs are rising, imported inputs are becoming more expensive, consumers are cutting expenditure and the exchange rate is uncertain, a business owner may reasonably decide that preserving cash is safer than taking on additional debt.
The three pressures above become Uganda’s one economic problem.Higher oil prices increase operating costs. A weaker shilling increases the cost of imported inputs. Higher costs squeeze business margins. Uncertain demand makes businesses cautious. Cautious businesses borrow less. Lower borrowing can mean less investment. Less investment can mean slower expansion and fewer new jobs. Slower business activity can weaken household incomes and demand even further. And when demand weakens, businesses become even less willing to invest. That is the cycle Uganda must avoid.
For households, the first response should be preparation rather than panic. Families should assume that some prices may remain elevated for longer than expected and reorganise their budgets accordingly. Food, rent, school fees, transport and other essential expenditure should take priority over discretionary spending. The temptation during difficult economic periods is to borrow to preserve a lifestyle that income can no longer comfortably support. This can create a second crisis after the first one. Before taking a loan, households should ask a simple question: What will this money produce?
Borrowing for an income generating purpose is fundamentally different from borrowing to finance consumption. Households should also strengthen their savings buffers, even if the amount saved each month is small. A modest emergency fund can make the difference between surviving a temporary shock and having to resort to expensive emergency borrowing.
Businesses must protect cash. For businesses, cash-flow management could become more important than rapid expansion. A business can be profitable on paper and still collapse because it does not have enough cash to pay suppliers, workers, taxes and other immediate obligations. Businesses should therefore tighten collection of outstanding debts, negotiate reasonable payment periods with suppliers, avoid excessive stock and examine every major expense. Where possible, they should reduce unnecessary exposure to the dollar by sourcing inputs locally. This does not mean abandoning imports. It means asking whether every imported input is essential and whether a competitive local alternative exists. Businesses should also examine their pricing carefully.
Absorbing every increase in fuel, transport and imported inputs may eventually destroy margins. But passing every increase directly to consumers can also destroy demand. The answer is a balance between protecting margins and retaining customers.
The current situation exposes a deeper question about Uganda's economic model. Why does an external oil disruption have such a powerful effect on our economy? Why does movement in the dollar have such a strong effect on the cost of doing business? Why do businesses become so cautious when the cost of imported inputs rises? The answer is partly our continued dependence on imports and our limited capacity to produce enough of what we consume competitively. This is where the present crisis could become an opportunity.
Uganda can use the pressure to accelerate local manufacturing, improve agricultural productivity, develop alternative energy sources, strengthen regional exports and encourage businesses that earn foreign exchange.
Uganda cannot control what happens in the Strait of Hormuz. We cannot determine the global value of the dollar. We cannot force a business to borrow when its owner believes the market is too uncertain, but we can decide how prepared we are. Households can spend more carefully, save where possible and avoid unnecessary debt. Businesses can protect cash, manage costs and borrow only for productive purposes.
Banks can design financing that responds more realistically to the needs of productive enterprises. Government can create a more predictable environment for investment, production and exports. The present oil and currency pressures should therefore not be treated simply as another temporary economic headache. They are a test of Uganda's economic resilience.
The country that emerges strongest will not necessarily be the one that avoids every shock. It will be the one that learns how to absorb shocks without allowing them to destroy household welfare, businesses and investment.
The oil may come from Hormuz, the dollar may come from global markets, but Uganda's resilience must be built at home.
Dr Julius Othieno holds a PhD in Business Administration and writes on economic and business affairs.
Uganda can use the pressure to accelerate local manufacturing, improve agricultural productivity, develop alternative energy sources, strengthen regional exports and encourage businesses that earn foreign exchange.
Uganda cannot control what happens in the Strait of Hormuz. We cannot determine the global value of the dollar. We cannot force a business to borrow when its owner believes the market is too uncertain, but we can decide how prepared we are. Households can spend more carefully, save where possible and avoid unnecessary debt. Businesses can protect cash, manage costs and borrow only for productive purposes.
Banks can design financing that responds more realistically to the needs of productive enterprises. Government can create a more predictable environment for investment, production and exports. The present oil and currency pressures should therefore not be treated simply as another temporary economic headache. They are a test of Uganda's economic resilience.
The country that emerges strongest will not necessarily be the one that avoids every shock. It will be the one that learns how to absorb shocks without allowing them to destroy household welfare, businesses and investment.
The oil may come from Hormuz, the dollar may come from global markets, but Uganda's resilience must be built at home.
Dr Julius Othieno holds a PhD in Business Administration and writes on economic and business affairs.