Uganda Shilling in red: Can we redeem it?

By Dr. Mike Ibrahim Okumu

The Uganda Shilling (UGX) has been severely bruised by other currencies. For example, between Financial Year (FY, July to June) 2000/01 to FY 2017/18 the UGX has been depreciating at an average of 5.6 percent. This has resulted in UGX losing 122.7 percent of its value over the same the period, from 1,723.84 to 3,839.5 against a US$! In my view, such a depreciation is tantamount to the shilling being in crisis, an outlook Ugandans should be concerned about just like the recently imposed tax measures especially Mobile Money tax!

Ordinarily, a depreciating UGX should be associated with increased exports, as its weakness should ideally make Uganda's exports cheaper. However, over the period 2002 to 2017 exports and imports as percentages of GDP have grown at an average of 4 percent and 12 percent respectively. This simply suggests that the depreciating UGX is not inducing sufficient exports growth, whereas in its midst imports continue to be high, a dilemma resulting in a persistent trade deficit.

As such a weak UGX should be a concern as it carries with it exchange rate pass through effects to inflation. Imported inflation risks have the potential of inducing the Central Bank Rate upwards which would undermine Central Bank efforts to promote private investments through inducing a downward movement of lending rates. Ripple effects such as these will ultimately choke Uganda's economy which is already struggling to propagate robust economic growth.

The fundamental questions are: 1) what could be causing the weakening of the UGX? What mechanisms should we employ to foster a strong UGX?

I provide a few ideas. Whereas the outlook may be on account of high corporate dollar demand as economic activity picks up as well as easy global financial market conditions, the persistent nature of the depreciation trend point to structural weaknesses in the economy.

For example, the weakening UGX could be attributed to the apparent saving-investment gap of 10.1 percent of GDP. Existence of the gap suggests that Ugandans demand certain goods and services that cannot be produced in Uganda. This is because the saving rate (15.5 percent of GDP) in Uganda is low to enable investment in local production facilities that can produce the goods and services desired by Ugandans. Indeed, it is not surprising that you can walk into any supermarket and struggle to find a "Made in Uganda" product even the basics such as tooth picks!

Worse still, local wealthy Ugandans are averse to manufacturing. In their behaving so, they have opted for the easier option of sinking a lot of money in real estate and arcades and purchase of square miles of land that is laying idle hence becoming absentee landlords. Rentals and arcades typically depend on imported products for construction which exacts downward pressure on the UGX against the US Dollar. Secondly, when arcades are occupied by shop keepers, you can hardly find "Made in Uganda" products on the shelves. However, if local

wealthy Uganda have the nerve to venture into high end manufacturing, this could surely be a straight path to minimizing importation of goods and services. This consequently begs the question are the likes of Private Sector Foundation Uganda (PSFU), Uganda Manufacturers Association (UMA), Uganda Small Scale Industries Association (USSIA) and Uganda Chamber of Commerce (UCC) doing enough to propagate local manufacturing that addresses domestic demand for various categories of persons at affordable prices?

Also the full liberalization of our economy has partly come to hurt the UGX against the US Dollar. First, there are no restrictions regarding ownership of a foreign owned company in Uganda. Secondly, Uganda operating an open capital account implies that foreign currency can move in and out of the country without any restrictions. In that regard, while companies like MTN and Airtel have scored immensely in terms reducing the cost of transactions by making networking easier for both business and social purposes, the fact that at least 90 percent of these companies are foreign owned implies that dividend payments would always create pressure on the UGX to depreciate.

With an open current account, could we guard the UGX by requiring at least larger than life foreign owned companies to list on the Uganda Stock Exchange (USE)? Listing on the USE would partly abate the pressure for the UGX to depreciate due to an increase in corporate demand for foreign currency following dividend payments. This is because part of the dividend payments would be paid to domestic shareholders. Otherwise, we could devise a unique tax regime for larger than life foreign owned companies, for example, by requiring them to pay corporation tax higher than 30 percent.

We could as well consider auctioning our key cash crops such as Coffee, Tea, Maize, Cocoa and Cotton in Uganda. Auctioning within Uganda would imply that farmers through their processing factories are connected to international buyers. This has the advantage of farmers and Uganda as whole earning competitive prices on these crops. In doing so, we would be having a guarantee of higher foreign exchange earnings as opposed to trading through middlemen who more often than not operate on behalf of foreign owned firms with links to international markets. This has resulted in Uganda perpetually missing out on value for money as regards forex earnings on its key commodity exports. In that regard, opening up an auction platform for coffee, tea, cocoa and Cotton will be a positive move towards buffering the UGX.

We may also consider restrictions regarding how long one can hold foreign currency outside the banking system. While we are required to give the source of foreign funds at the point of foreign currency exchange into UGX, we are never required to state when the foreign currency was received. Perhaps giving persons a grace period within which foreign currency can be held outside the formal financial system could be useful in buffering the UGX. As this would put pressure on holders of foreign currency to exchange it for the UGX within a specified period of time.

In conclusion, quick fixes can be attained through aggressively promoting tourism and bringing forward crude oil commercialization. In the long term, Uganda Development Bank (UDB) should identify and develop manufacturing companies after which the companies should be listed on the stock exchange to allow for private ownership. Finally, effort should be directed towards beneficiation of mineral resources to ensure the highest return possible off metal exports.

Writer is a lecturer at the School of Economics of Makerere University