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Shilling depreciation likely to affect 2018/19 budget credibility

By Admin

Added 5th July 2018 04:50 PM

It’s quite unfortunate that the ministry of finance did not indicate in all the budget documents and website the exchange rate at which the FY 2018/19 budget will be implemented.

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It’s quite unfortunate that the ministry of finance did not indicate in all the budget documents and website the exchange rate at which the FY 2018/19 budget will be implemented.

By Ronald Mugobera

On July 1, 2018 the implementation of the financial year 2018/19 budget commenced. The sh32.702 trillion budget comes at a time when the Ugandan shilling is losing value against major currencies more especially the US dollar.

The rate at which the Ugandan shilling is losing value against the US dollar sends the credibility of the FY 2018/19 budget in a dilemma as the planning figures are likely to lose their purchasing power at the actual time of budget implementation.

From July 2017 to April 2018, the Uganda shilling weakened against the US Dollar, depreciating on average by 3.0% percent, year-on-year, to UGX 3,697.2. In July 2017, the shilling had depreciated by 6.6 percent year-on-year. The depreciation of the Shilling was generally attributed to increased demand from oil, manufacturing and telecom sectors. By mid-day, July 2, 2018, the US dollar was buying at sh3,874.74 and selling at sh3,884.75 per dollar.

It’s quite unfortunate that the ministry of finance did not indicate in all the budget documents and website the exchange rate at which the FY 2018/19 budget will be implemented.

The total budget for the FY 2018/19 is sh32.7 trillion approximately 32.12% of Uganda’s Gross Domestic Product (GDP) of sh101.8 trillion ($27b). The works sector took the lion’s share of the total budget at sh4,786.62b (19.08%). This was followed by the education sector at sh2,782.57 billion (11.09%); interest payment at sh2,514.11b (10.02%) and in the fourth position is the Energy sector with sh2,438.20 (9.72%).

Apart from the education sector, all the high spending agencies highlighted in the FY 2018/19 budget consume imported inputs which therefore puts the demand for the dollar at a high level compared to the Ugandan currency.

From the budget speech, Uganda’s imports increased by 16.4% valued at $5.7b in the period 2017 to March 2018 from $4.9b over the same period the previous year. On the other hand, export earnings also rose from $3.59b in July 2017 to $3.93b in March 2018. From this, it is crystal clear that our balance of payments (BoP) is in a deficit. This shows Uganda’s high appetite to import than its ability to export in equal measure as it imports.

Uganda’s high spending agencies rely mostly on imports. Taking the works, security and energy sectors for instance, much of the capital needed to expedite their projects' implementation are imported like capital machinery and equipment, oil meant to facilitate mobility of the factors of production and other necessary capital inflows. Unfortunately all these capital/machinery inflows are to be purchased in foreign currency while the Ugandan shilling will be left to circulate within the boundaries of Uganda.

With the high rate of depreciation of the Ugandan currency, it is likely to lead to inability of Government Ministries, Departments and Agencies (MDAs) to implement most of the projects as the purchasing power of the approved budget figures will have reduced by the time of implantation. Subsequently, MDAs are likely to ask for supplementary budgets on account of depreciation of the local currency.

To salvage the situation, Bank of Uganda (BoU) should consider both long and short term solutions as exchange rates affect economic activities in both periods-short and long runs.

There is need for Government to come up with well-developed hedging facilities like forward contracts and institutions that insulate Government importing MDAs from the risks of exchange rate volatilities or depreciation of the Ugandan shilling.

Import-substitution industries should be enhanced by Government. Much as government of Uganda has the Buy Uganda Build Uganda (BUBU) policy, there is much needed to be done to work on the quality of products put on the market to attract customers. The cost of doing business in the country like access to electricity needs to be addressed.

The government equally needs to enhance export promotion strategies to fetch more revenue for the country and also reduce on the BoP deficit. Uganda has got a comparative advantage in the agricultural sector. The dominance of coffee as Uganda’s leading export is a testimony to this.

Other untapped export potential (non-traditional exports) should be identified to diversify our export portfolio. These however need to be of good quality to compete favorably on the global market.

In summary, the current rate of the Ugandan shilling is expected to affect the FY 2018/19 budget credibility. This should be mitigated to avoid further depreciation of the local currency and enhance budget credibility within the country.

The writer is an economist at the School of Economics-Makerere University

+256775120479/+256752082269 mugobera@gmail.com

 

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