Fix forex rate, Govt advised

The director of economic affairs at the Movement Secretariat, Dr. Ezra Suruma, has proposed a return to the fixed exchange rate to contain further fall of the Shilling, reports Grace Matsiko and Felix Osike. In a confidential report presented to the Movement National Executive Committee (NEC) meeting, Suruma, a former Uganda Commercial Bank chairman, said the Shilling had depreciated by 2,400% since 1987. He said the depreciation was due to the fluctuating rates against the US dollar. The report on possible innovations in debt management to increase infrastructure development and employment in Uganda is a memorandum of the Movement directorate of Economic Affairs presented to the NEC meeting. "One solution is to fix the exchange rate. This is what Malaysia has done. After weighing the terrible implications, they have taken the courageous decision, probably against the IMF advice, and fixed their exchange rate," Suruma said. By September 2000, they had managed to maintain this for three years. Uganda may wish to examine this option and find out from Malaysia how they have managed to do it," Suruma said, adding that Uganda must "innovate or perish." Under the International Monetary Fund and the World Bank's structural adjustment programmes, Uganda adopted the floating exchange rate system. "During the past 13 years (1987-2000) the Shilling has been depreciating in value relative to the Dollar. Following the currency conversion of May 1987, the value of the dollar in shilling terms changed from 14 to 60 shillings. By May 2000, the exchange rate had depreciated to sh1,500 per dollar. This means that the Shilling has depreciated by 2,400% over the 13 years since 1987," Suruma said. He said the 2,400% gives an average depreciation of 185% per annum. "For example, where Government needed only sh45m in 1987 to pay the annual interest on a World Bank loan of US$100m, in May 2000, Government needed sh1.125b to purchase the same quantity of US dollars from the market. This is an enormous increase that Government should not ignore in its planning," he said. Suruma discouraged Government from external borrowing, saying it costs much more than domestic borrowing. "It is not true that external loans provided on the most concessional terms are cheaper than domestic loans. The apparently high domestic interest rates on bonds turn out to be cheaper in comparison to long-term external loans which must be repaid in dollars," he said. "The Government has to look at the cost of borrowing at home and overseas and come up with a strategy to make the cost of borrowing affordable" he said. He said, "A US 100m obtained in 1990, assuming no grace period, will by now have cost the Uganda government about sh107.4b in principal and interest. But if the equivalent had been borrowed locally, the cost to government would have been sh65b." Ends.