B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016 B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016
THE REPUBLIC OF UGANDA • The shilling value of the foreign currency Recommendations denominated loans grew on average by 39% in • September and 36.8% in October on a year on An import substitution strategy would address year basis. the bloated import bill for example by improving the public transport system, quality of locally Uganda Shilling depreciation in FY2015/16: Can a • Debt service tends to deprive the country of manufactured medicines and used clothes re-occurrence be mitigated? foreign exchange needed for importation of would serve as substitutes to these imports capital goods as it creates a liquidity constraint. highly imported commodities. • Increase in the volume and variety of • Increased government expenditure on account exports, through value addition and of exchange depreciation exerts pressure quality control reviews of exports. For OVERVIEW KEY ISSUES on government budget, for instance, various example the tourism sector budget missions whose budgets are met in foreign should be increased, specifically towards The National Budget Framework paper for • The causes of the Uganda Shilling currency have had supplementary requests of marketing Uganda which has a number Financial Year 2016/17 approved by Parliament depreciation were largely external. Ug shs 14.9 billion on account of lost poundage. of untapped tourist opportunities indicated that Government would pay interest • The mitigation measures like that if promoted would yield on debt worth Ug shs 2 trillion up from Ug shs reducing imports and boosting/ the requisite returns over the years. 1.65 trillion in the current Financial Year 2015/16. Government Interventions diversifying exports are medium- • Operationalization of the local content policy of This rise in the interest payments for both Through BoU, government intervenes to stem term measures that may not easily ‘Buy Uganda Build Uganda’ where companies domestic and external debt of Ug shs 350 volatility of the exchange rate, as was the case in be achieved. investing in public infrastructure would have billion reflects increased costs of borrowing and the quarter ended August 2015 where BoU sold to procure raw materials locally for example exchange rate depreciation • The GoU operates a flexible USD 50 million. cement from the local market as opposed to exchange rate and cannot have Exchange rate is the price of one country’s absolute control on the level of With effect from January FY2015/16, all local importing. money in terms of another’s. The exchange exchange rate. contracts with GoU are to be issued in Ug shs. References risk includes depreciations and appreciations of the currency (Uganda shilling) that impact It is important to note that GoU operates a flexible 1. Bank of Uganda website (www.bou.or.ug) the free cash flows of a country. Local currency exchange rate and cannot have absolute control depreciation creates a need for increased on the level of exchange rate. 2. Bank of Uganda Monetary Policy Reports resources to service the same level of foreign (December, October, August 2015) currency debt. An appreciation has the opposite INTRODUCTION Conclusion 3. Export Promotions Board Data December impact. 2015 The value of external debt tends to increase The exchange rate used for the budget with depreciation in the exchange rate. This In addition to debt service, depreciation of the 4. MFPED (2015), “Approved Estimates of for the FY2015/16 was Ug shs/$3,098 increases government costs and distorts the currency necessitates additional resources for Revenue and Expenditure (Recurrent and imports, missions abroad and foreign currency however, for the first 8 months of budget execution. The factors that led to the FY2015/16 the Ug shs/$ exchange rate shilling depreciation included strong US dollar, Development) FY 2015/16” denominated contracts; all of which are budgeted for in Uganda Shillings but settled in foreign fluctuated as indicated in table 1. falling global commodity prices, declining crude oil 5. MFPED Directorate of Debt and Cash currency. prices, a reoccurrence of the shilling depreciation Management Data March 2016 When the exchange rates were applied cannot be ruled out considering that the causes 6. MFPED (2015), “National Budget Framework Repayment of foreign denominated debt to the actual outturns of interest discussed in this brief remain eminent. So far, GoU payments for the period July to efforts to control for a plausible reoccurrence of the Paper 2016/17” increases the demand of foreign currency which exerts more pressure on the shilling. This policy February 2016, it was noted that depreciation are modest and need augmentation 7. Todd J & Hanley S Chiang (2003), “Other Ug shs 15.053 billion was lost on as follows. brief assesses the Government’s interventions to Costs of High Debt in Poor Countries 2003 hedge against the re-occurrence of the shilling account of exchange rate depreciation th depreciation. and could further rise up by 30 For more information contact: June 2016. Budget Monitoring and Accountability Unit (BMAU) Ministry of Finance, Planning and Economic Development P.O Box 8147, Kampala www.finance.go.ug
4 Ministry of Finance, Planning and Economic Development Ministry of Finance, Planning and Economic Development 1 B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016 B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016
Causes of the exchange rate resulted into flight to quality and/or portfolio depreciation assets reallocation from Uganda. • There are a number of causes for currency Supply on the other hand comes through export 15,052,998 120,378,887 135,431,885 38,856,968 Total depreciations including local and foreign factors. earnings and foreign direct investments; The domestic factors form the main pressures and • Reduced Exports: It was observed that exports stem from the dollar demand-supply imbalance were subdued as export receipts fell by 4.6% pressures from both public entities and private in the period ended October 2015 compared to 2,232,731 20,519,138 22,751,870 6,623,350 3,435 3,383 February firms. Dollar demand is heavier with government the same period in the FY 2014/15. This was and private firms demanding for both final and partly driven by declining commodity prices, intermediary goods and services from foreign for example Robusta coffee prices declined by markets. 20.2%. Food prices, as measured by the Food 3,821,987 33,523,548 37,345,535 10,821,029 3,451 3,484 January According to the Bank of Uganda (BoU) monetary and Agricultural Organization (FAO) food price policy reports for the months of August, October index, declined by 2% monthly in the quarter and December 2015, key to the exchange to December 2015 affecting all major food commodity prices. Export earnings remained depreciation was: sluggish although receipts increased by 1% in 1,199,825 14,053,154 15,252,979 4,536,202 3,362 3,382 December • The global strengthening of the USD on account quarter 4-2015
of strong economic performance amidst tight • Direct investment net inflows declined by 29% Average Monthly Exchange Rate Ug Rate Exchange Monthly Average shs/$ Exchange Rate Ugshs/$ Ugshs/$ Rate Exchange budget the Ugshs/$ at Rate Exchange time monetary policy, the shilling depreciated year to USD 181 million. According to Bloomberg on year by 40% against the United States Dollar markets news foreign depreciation pressures (USD) to an average mid rate of Ug shs 3,668 713,061,053 6,673,907 7,386,968 2,154,263 3,429 3,362 November arise from effects/implications of policy in September 2015. changes in the developed economies like the • Bloated import bill: Although the import bill US, UK and Europe on developing economies.
February declined by 9.2% to USD 1,527.1million, this A shift in economic policies in the developed economies tends to trickle down into emerging 1,310,762 7,547,843 8,858,605 2,436,360 3,636 3,565 October was driven by drop in the value of oil imports,
January that declined by 34% on account of the drop in market economies like Uganda through international oil prices. There was also a decline declines in demand for local exports, foreign in private sector demand for non-oil imports by direct investments and other project support.
December 8.2% from USD 1,144 million. However, the The interest rate hike of the US Fed rate in 4,276,228 23,262,080 27,538,308 7,508,741 3,667 3,700
September import bill remained bloated amidst predictions December was seen to negatively impact the November of increased private sector imports of consumer shilling which depreciated by 2.6% month
goods especially during the festive season. on month basis by January 2016 as offshore October Additional factors that heightened the demand investors reallocated their dollars into US 590,169 4,060,282 4,650,452 1,310,614 3,548 3,663 August assets.
Months for FY 2015/16 FY for Months for foreign exchange included continued expenditure on public infrastructure projects.
September Effects of the exchange rate
• Increase in corporate demand on account of August depreciation 908,234 10,738,935 11,647,167 3,466,409 3,360 3,430 July payment of dividends and profit repatriation by
• Fast paced exchange rate depreciation is a July foreign owned companies. negative supply shock for the economy, • A reduction of inflows from Non Government it raises the cost of supplying goods and Organizations (NGOs) and personal transfers services in the economy, because many
3,800 3,600 3,400 3,200 3,000 2,800 2,600 Ug shs/$ Ug in the Quarter to October 2015. of these goods and services are either directly imported or are produced locally • Other unintended negative factors existed in but require imported inputs during their the form of currency speculation especially production. This effectively causes inflation, in the run up to the presidential elections, for example in the month of September 2015, noise and expectation as different economies headline inflation rose to 7.2% from 4.8% in Total loss in Ug shs (000) Total Outturn Interest Payments shs (000) budget rate 3,098 Outturn Interest Payments shs( 000) rate Avrg Outturn Interest Payments $ Average month exchange rate shs/$ Average Month Exchange rate shs/$ month end August, reflecting a pass through of exchange Table 1: Monthly Exchange Rate and Interest Payments on External Debt as at end of month (July 2015-February 2016) Table Source: BOU & MFPED Monthly Exchange Rates Ug shs/$ against Budget Rate FY2015/16 Average Figure 1: Source: BOU & MFPED compared to each other by offshore investors rate depreciation to domestic prices.
2 Ministry of Finance, Planning and Economic Development Ministry of Finance, Planning and Economic Development 3 B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016 B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016
Causes of the exchange rate resulted into flight to quality and/or portfolio depreciation assets reallocation from Uganda. • There are a number of causes for currency Supply on the other hand comes through export 15,052,998 120,378,887 135,431,885 38,856,968 Total depreciations including local and foreign factors. earnings and foreign direct investments; The domestic factors form the main pressures and • Reduced Exports: It was observed that exports stem from the dollar demand-supply imbalance were subdued as export receipts fell by 4.6% pressures from both public entities and private in the period ended October 2015 compared to 2,232,731 20,519,138 22,751,870 6,623,350 3,435 3,383 February firms. Dollar demand is heavier with government the same period in the FY 2014/15. This was and private firms demanding for both final and partly driven by declining commodity prices, intermediary goods and services from foreign for example Robusta coffee prices declined by markets. 20.2%. Food prices, as measured by the Food 3,821,987 33,523,548 37,345,535 10,821,029 3,451 3,484 January According to the Bank of Uganda (BoU) monetary and Agricultural Organization (FAO) food price policy reports for the months of August, October index, declined by 2% monthly in the quarter and December 2015, key to the exchange to December 2015 affecting all major food commodity prices. Export earnings remained depreciation was: sluggish although receipts increased by 1% in 1,199,825 14,053,154 15,252,979 4,536,202 3,362 3,382 December • The global strengthening of the USD on account quarter 4-2015
of strong economic performance amidst tight • Direct investment net inflows declined by 29% Average Monthly Exchange Rate Ug Rate Exchange Monthly Average shs/$ Exchange Rate Ugshs/$ Ugshs/$ Rate Exchange budget the Ugshs/$ at Rate Exchange time monetary policy, the shilling depreciated year to USD 181 million. According to Bloomberg on year by 40% against the United States Dollar markets news foreign depreciation pressures (USD) to an average mid rate of Ug shs 3,668 713,061,053 6,673,907 7,386,968 2,154,263 3,429 3,362 November arise from effects/implications of policy in September 2015. changes in the developed economies like the • Bloated import bill: Although the import bill US, UK and Europe on developing economies.
February declined by 9.2% to USD 1,527.1million, this A shift in economic policies in the developed economies tends to trickle down into emerging 1,310,762 7,547,843 8,858,605 2,436,360 3,636 3,565 October was driven by drop in the value of oil imports,
January that declined by 34% on account of the drop in market economies like Uganda through international oil prices. There was also a decline declines in demand for local exports, foreign in private sector demand for non-oil imports by direct investments and other project support.
December 8.2% from USD 1,144 million. However, the The interest rate hike of the US Fed rate in 4,276,228 23,262,080 27,538,308 7,508,741 3,667 3,700
September import bill remained bloated amidst predictions December was seen to negatively impact the November of increased private sector imports of consumer shilling which depreciated by 2.6% month
goods especially during the festive season. on month basis by January 2016 as offshore October Additional factors that heightened the demand investors reallocated their dollars into US 590,169 4,060,282 4,650,452 1,310,614 3,548 3,663 August assets.
Months for FY 2015/16 FY for Months for foreign exchange included continued expenditure on public infrastructure projects.
September Effects of the exchange rate
• Increase in corporate demand on account of August depreciation 908,234 10,738,935 11,647,167 3,466,409 3,360 3,430 July payment of dividends and profit repatriation by
• Fast paced exchange rate depreciation is a July foreign owned companies. negative supply shock for the economy, • A reduction of inflows from Non Government it raises the cost of supplying goods and Organizations (NGOs) and personal transfers services in the economy, because many
3,800 3,600 3,400 3,200 3,000 2,800 2,600 Ug shs/$ Ug in the Quarter to October 2015. of these goods and services are either directly imported or are produced locally • Other unintended negative factors existed in but require imported inputs during their the form of currency speculation especially production. This effectively causes inflation, in the run up to the presidential elections, for example in the month of September 2015, noise and expectation as different economies headline inflation rose to 7.2% from 4.8% in Total loss in Ug shs (000) Total Outturn Interest Payments shs (000) budget rate 3,098 Outturn Interest Payments shs( 000) rate Avrg Outturn Interest Payments $ Average month exchange rate shs/$ Average Month Exchange rate shs/$ month end August, reflecting a pass through of exchange Table 1: Monthly Exchange Rate and Interest Payments on External Debt as at end of month (July 2015-February 2016) Table Source: BOU & MFPED Monthly Exchange Rates Ug shs/$ against Budget Rate FY2015/16 Average Figure 1: Source: BOU & MFPED compared to each other by offshore investors rate depreciation to domestic prices.
2 Ministry of Finance, Planning and Economic Development Ministry of Finance, Planning and Economic Development 3 B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016 B M A U B r i e fi n g P a p e r [ 1 2 / 1 6 ] May 2016
THE REPUBLIC OF UGANDA • The shilling value of the foreign currency Recommendations denominated loans grew on average by 39% in • September and 36.8% in October on a year on An import substitution strategy would address year basis. the bloated import bill for example by improving the public transport system, quality of locally Uganda Shilling depreciation in FY2015/16: Can a • Debt service tends to deprive the country of manufactured medicines and used clothes re-occurrence be mitigated? foreign exchange needed for importation of would serve as substitutes to these imports capital goods as it creates a liquidity constraint. highly imported commodities. • Increase in the volume and variety of • Increased government expenditure on account exports, through value addition and of exchange depreciation exerts pressure quality control reviews of exports. For OVERVIEW KEY ISSUES on government budget, for instance, various example the tourism sector budget missions whose budgets are met in foreign should be increased, specifically towards The National Budget Framework paper for • The causes of the Uganda Shilling currency have had supplementary requests of marketing Uganda which has a number Financial Year 2016/17 approved by Parliament depreciation were largely external. Ug shs 14.9 billion on account of lost poundage. of untapped tourist opportunities indicated that Government would pay interest • The mitigation measures like that if promoted would yield on debt worth Ug shs 2 trillion up from Ug shs reducing imports and boosting/ the requisite returns over the years. 1.65 trillion in the current Financial Year 2015/16. Government Interventions diversifying exports are medium- • Operationalization of the local content policy of This rise in the interest payments for both Through BoU, government intervenes to stem term measures that may not easily ‘Buy Uganda Build Uganda’ where companies domestic and external debt of Ug shs 350 volatility of the exchange rate, as was the case in be achieved. investing in public infrastructure would have billion reflects increased costs of borrowing and the quarter ended August 2015 where BoU sold to procure raw materials locally for example exchange rate depreciation • The GoU operates a flexible USD 50 million. cement from the local market as opposed to exchange rate and cannot have Exchange rate is the price of one country’s absolute control on the level of With effect from January FY2015/16, all local importing. money in terms of another’s. The exchange exchange rate. contracts with GoU are to be issued in Ug shs. References risk includes depreciations and appreciations of the currency (Uganda shilling) that impact It is important to note that GoU operates a flexible 1. Bank of Uganda website (www.bou.or.ug) the free cash flows of a country. Local currency exchange rate and cannot have absolute control depreciation creates a need for increased on the level of exchange rate. 2. Bank of Uganda Monetary Policy Reports resources to service the same level of foreign (December, October, August 2015) currency debt. An appreciation has the opposite INTRODUCTION Conclusion 3. Export Promotions Board Data December impact. 2015 The value of external debt tends to increase The exchange rate used for the budget with depreciation in the exchange rate. This In addition to debt service, depreciation of the 4. MFPED (2015), “Approved Estimates of for the FY2015/16 was Ug shs/$3,098 increases government costs and distorts the currency necessitates additional resources for Revenue and Expenditure (Recurrent and imports, missions abroad and foreign currency however, for the first 8 months of budget execution. The factors that led to the FY2015/16 the Ug shs/$ exchange rate shilling depreciation included strong US dollar, Development) FY 2015/16” denominated contracts; all of which are budgeted for in Uganda Shillings but settled in foreign fluctuated as indicated in table 1. falling global commodity prices, declining crude oil 5. MFPED Directorate of Debt and Cash currency. prices, a reoccurrence of the shilling depreciation Management Data March 2016 When the exchange rates were applied cannot be ruled out considering that the causes 6. MFPED (2015), “National Budget Framework Repayment of foreign denominated debt to the actual outturns of interest discussed in this brief remain eminent. So far, GoU payments for the period July to efforts to control for a plausible reoccurrence of the Paper 2016/17” increases the demand of foreign currency which exerts more pressure on the shilling. This policy February 2016, it was noted that depreciation are modest and need augmentation 7. Todd J & Hanley S Chiang (2003), “Other Ug shs 15.053 billion was lost on as follows. brief assesses the Government’s interventions to Costs of High Debt in Poor Countries 2003 hedge against the re-occurrence of the shilling account of exchange rate depreciation th depreciation. and could further rise up by 30 For more information contact: June 2016. Budget Monitoring and Accountability Unit (BMAU) Ministry of Finance, Planning and Economic Development P.O Box 8147, Kampala www.finance.go.ug
4 Ministry of Finance, Planning and Economic Development Ministry of Finance, Planning and Economic Development 1