Shilling to hit wages, electricity and school fees hard, taxes to benefit

By Samuel Sanya, Faridah Kulabako & Roselynn Karatsi
 
Nicholas Olupot, a teacher at Bishop West Primary School in Mukono earns sh350, 000 each month. While he thinks it's insufficient, economic experts say the falling shilling is set to cut the real value of wages.
 
Despite intervention by Bank of Uganda, the shilling dipped to 3070/80 buying and selling respectively at mid-day at most commercial banks on Thursday.
 
This was lower than 3022/32 at the close of business on Wednesday.  As the price of crude oil declined, the dollar strengthened with growth in the US economy.
 
Uganda imports twice as much as it exports leading to scarcity of dollars. The strengthening of dollar means traders now require more shillings for every dollar.
 
Christine Alupo, the Bank of Uganda Director Communications says the dollar has put pressure on many currencies around the world. She said the depreciation of the shilling exchange rate against the dollar is part of a worldwide trend. 
 
"The dollar has itself strengthened dramatically on global markets, gaining by 13% against the Euro. Secondly, in Uganda demand for dollars has increased strongly, mainly from the corporate sector, to fund imports and dividend payments to foreign shareholders following improved corporate profits in 2015," Alupo says.
 
"Unfortunately export earnings have declined mainly because of problems in foreign exchange markets, hence the current account deficit has widened," she added.
 
Alupo notes that the Central Bank's policy is not to peg the exchange rate or to prevent it from adjusting to levels which are sustainable in the long run.
 
She says the Central Bank will only intervene to dampen volatility when the shilling gains or loses value too rapidly. She says that the Central Bank intervened and shored up the shilling on Wednesday morning after a sharp fall against the dollar.
 
"There has been concern voiced in the media about a re-run of the instability of 2011, especially because of fears of election related public spending, and these concerns
might be contributing to the pressure on the exchange rate," she says.
 
Alupo says the economy has changed significantly since 2011 elections especially since the Central Bank now has a new macroeconomic framework.
 
"The Bank of Uganda will not finance Government borrowing and it will use its policy interest rate to forestall any danger of inflation rising above the medium term policy target of 5%," she said.
 

Bank of Uganda

Alupo added that the strength of Uganda's macroeconomic framework has been recognized by international credit rating agencies such as Fitch which upgraded Uganda's sovereign credit rating from B to B+.
 
In light of recent shilling depreciation, currency traders say commercial banks are hoarding dollars to make a quick buck from the higher dollar rates.
 
Forex Bureaus are also panicking. "The market is very complex so we have to keep our eyes open like the eagles to avoid losses. It's difficult to regulate the dollar since what is happening is beyond our local regulators,
 
"Even the Naira has depreciated despite Nigeria's strong economy. It has lost about 50-60% value," a Forex Bureau operator said.
 
Another says: "For the last two days the shilling has been depreciating so it will probably maintain that trend.  The Chinese Market opened again in February and this has increased demand for the dollar which has also increased its strength."
 
Julius Wandera of the Electricity Regulatory Authority (ERA) says electricity tariffs could go up should the shilling continue to slide and other costs like fuel remain constant. 
 
Kassim Omar, chairman of the Uganda Clearing and Forwarding Association warns that schools might not be able to cope should the shilling continue to decline. 
 
"If this goes on for longer, schools might not be able to meet the day-to-day costs. The standards of living will decline as the real value of wages declines; public servants will be hit most," Omar says.
 
He explains that part of the shilling depreciation is happening due to mixture of local causes and global reasons primarily the declining price of oil. 
 
According to Patrick Wakida, the Chief Executive Officer of Research World International, the National Resistance Movement (NRM) spent a lot of money during its recent delegate's conference.
 
He says this increased of money in circulation while the dollar remained scarce resulting in the current trend of a weakening shilling.
 
He says that the shilling is expected to weaken further and commodity prices could soar between September and October this year as political parties increase their expenditure ahead of the 2016 general elections.
 
Though Wakida says the Central Bank should issue Treasury bills and bonds to shore up the shilling, he is skeptical whether that approach will ultimately be effective since Ugandans keep money in their pockets and under mattresses.
 

Forex Bureaus are also panicking

  Leonard Mutesasira, an economist says a weak current account balance, profit expatriation by telecoms and government buying dollars to finance major infrastructure projects such as power dams has created more demand the scarce dollar.
 
He says government needs to be pro-active to bring more dollars into the economy by propping sectors that fetch the country forex such as the tourism sector.
 
Lawrence Bategeka an economist has a different view. He says huge demand for the greenback is the problem and not supply. He says: "Look at the exports, Foreign Direct Investment (FDI), remittances and foreign aid, nothing has drastically changed,
 
"Now, for demand we look at seasonality. Dollar demand and credit to the government has spiked since July last year,
 
"You must remember that we are in an election year and we import election materials. So as this demand for forex rates peaks, it affects the exchange rate. What we do not now is whether it will be short-lived or will continue,
 
"But even if it was done once and we are now feeling the impact of higher demand, we can only wait for the season to go away."
 
Bategeka says the increase in credit to government implies that the Central Bank is printing money and giving it to government. He says the Central Bank will not tighten monetary conditions until after the elections.
 
He says the only way you can mitigate the situation is by increasing foreign currency inflows which would be hard given that exports, Foreign Direct Investment and remittances cannot increase overnight.
 
Bategeka says that when a problem starts, it has ripple effects such as the recent increase in commercial bank loan rates and a likely decline in private sector jobs.
 
He warned that increasing lending rates could hurt the banks instead. He reasoned that fewer people and businesses will be willing to borrow at higher rates resulting in lower revenues because banks profit from lending.
 
Bategeka says the good side of depreciation is that it excites exporters as exports become cheaper and more competitive abroad. Fred Muhumuza, an economist at audit firm KPMG says the shilling depreciation is a signal to increase exports.
 
"There is going to be a long and painful process as the economy adapts. This is a signal to wake us up from imports to focusing more on exports,
 
"Government ought to have taken action when fish exports declined and when coffee wilt hit. We did nothing then but it's time to do something," Muhumuza says. 
 
John Mayanja, the Uganda Revenue Authority (URA) assistant commissioner large tax payers says though the declining shilling will hurt the business community, it will result in higher tax collections.
 
He explains that the law mandates the URA to set a monthly dollar rate for tax purposes that is based on the average exchange rate of the previous month. The more expensive dollar this month will translate into higher taxes in April.
 
"If a trader was paying sh2,800 for each dollar in January and is now paying sh3,000, it is not good for them. However, the higher dollar rate means that we will collect more taxes without a corresponding increase in volumes," Mayanja explains.

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What people say (as told to Wilfred Sanya)


Isaac Kiryowa,  a contractor

The dollar is going to make us lose a lot of money. Some of us have signed agreements to carry out work at an agreed cost. When you go to buy paint now, the prices have gone up and you just have to lose on the percentage you are supposed to make off the job. We are so much affected, more especially we who buy items in small quantities.
 

Noe Segue, a foreign exchange dealer

We as business people need Bank of Uganda to add in more dollars to save the situation. Most of the people are now running business in losses because all the imported goods are bought using dollars. Currently there is an increase in prices. Bank of Uganda should make an effort to see that the price of a dollar goes down. This should enable people to work comfortably.
 

Abdul Hussein, operates Spot Cash Forex Bureau in Kampala

I have dealt in this business for over 18 years but the dollar has never reached this level.Every other day the dollar keeps going up. As I speak the dollar is sold at 3085. People have reduced on importations They are just selling old goods. At the moment we are operating at loss of sh138 of every transaction. People are no longer processing to get dollars anymore. It is necessary for government to intervene to stabilize the situation. Otherwise people are going to fail to do business.
 

Deepak Haria, an importer

I am definitely affected because I use dollars to import all my goods. In three months, a shilling has depreciated from sh2650 to sh3085. This is actually 12% depreciation, which is very tough. We have stopped placing in new orders. Instead the taxes are going up with Uganda Revenue Authority benefiting from us. Bank of Uganda should come to save the situation and stabilize the dollar. We sell our goods in local money so much that if we increase, people will just run away yet we pay rent. This year we expect to make losses as business people.
 

David Kalumba, an importer

I stopped importing. Instead I buy goods from the large importers.Some of the investors from China are not aware of the situation. I will remain in business along as  I increase on my stock and then I will raise the price.



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