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DEPRECIATION59th Session OF of theTHE State of UGANDANthe Nation Platform : IMPLICATIONS FOR THE NATIONAL ECONOMY

59TH SESSION OF THE STATE OF THE NATION PLATFORM

REPORT OF PROCEEDINGS 7TH AUGUST, 2015 AT PROTEA HOTEL KAMPALA Barbara Ntambirweki and Emma Jones STON Infosheet 59-Series 36, 2016

Abstract

Over the course of 2014/15 fiscal year, State of the Nation (STON) Platform the depreciated to bring together key stakeholders against the US by over 20%. for discussions on the likely impact , like many other economies, of the falling value of the Ugandan was struggling with the falling value shilling. Titled the “Depreciation of of its’ against the dollar the Ugandan Shilling: Implications for which was attributed to the fall in the National Economy”, three main export commodity prices, heavily recommendations emerged; chief impacted by export markets. This among them was the need to prioritise depreciation made mobilizing capital investment in the agricultural sector. from international markets difficult. Second was the need to pursue import Given the circumstances and the substitution and export promotion, and depreciation of the Ugandan shilling, thirdly the Government of Uganda long-term ramifications for the (GoU) was advised to prioritise the economy were likely. It was against adoption of an updated national this background that the Advocates monetary policy that reflected current Coalition for Development and economic needs. Environment (ACODE) held the 59th

1 DEPRECIATION OF THE UGANDAN SHILLING: IMPLICATIONS FOR THE NATIONAL ECONOMY

Introduction Background

The 59th STON Platform focused The 59th STON Platform was called at on understanding the implications a time when the value of the Ugandan of the depreciating value of the shilling had reached a record low of Ugandan shilling for the economy. 3,500 Ugandan per US dollar The dialogue brought together in July 20151. Between March and July officials from the Ministry of 2015, the shilling depreciated by over 20 Finance, Planning, and Economic percentage points2. The BoU attributed the Development (MoFPED), Members falling value of the Ugandan shilling to two of the Committee on National factors. First, the dollar had strengthened Economy and other Members of dramatically on global markets, evidence Parliament, civil society, academia, being the 13 percent strengthening of and the private sector to engage the US dollar against the since in honest discussions about the the start of 2015. Second, there was a depreciating value of the Ugandan large increase in demand for by shilling. The principal speakers Uganda, mainly from the corporate sector, for the session were Mr Keith to fund imports and dividend payments to Muhakanizi - Permanent Secretary foreign shareholders following improved and Secretary to the Treasury from corporate profits in 2015. Despite this MoFPED, Mr Ben Mungyereza increase in demand for foreign currency - Executive Director of Uganda there was a decline in export earnings Bureau of Statistics (UBOS), Mr due to problems in regional markets which Issa Sekitto - Spokesperson for widened the current account deficit. Kampala City Traders Association On several occasions, the BoU intervened (KACITA); and Dr Stephen Isabalija in a bid to address the depreciating - Board Member of Uganda Ugandan shilling by injecting more Development Bank. The session foreign currency into the economy to was chaired by Mr Edmond Kizito, absorb excess shillings and halt the renowned journalist and moderator. decline3. However this strategy was The objectives of the 59th STON recognised as ‘unsustainable4’ by the Platform were as follows: BoU. The implication of the position taken • To promote a deeper by the BoU was that alternative measures, understanding of the aimed at enhancing the supply of foreign implications of the depreciating exchange, should be adopted to address value of the Ugandan shilling the depreciating shilling. for the economy. • To ascertain the level of sustainability of the strategies being undertaken by the of Uganda (BoU) to address the depreciation. 1 See ‘BoU Trend Statistics’ showing exchange rates over time, available online at www.bou.or.ug • To learn lessons from Uganda 2 For more information, Enock Nyorekwa Twinoburyo, and develop measures for PhD (2015), explains how the depreciating shilling managing the volatility of the affected the Ugandan Economy, available online at www.utamu.ac.ug Ugandan currency against the 3 ‘Shilling loses grip despite Central Bank dollar and other . interventions’, available online at /www.monitor.co.ug 4 ‘Here is why the Uganda Shilling is weakening’, available online at /www.monitor.co.ug

2 59th Session of the State of the Nation Platform

“It is not sustainable for the to try and prop up the , at levels which are not consistent with supply and demand in the , by intervening and selling foreign currency. The Bank of Uganda would simply deplete its foreign exchange reserves if it attempted to do this”. Mr Emmanuel Tumusiime Mutebile, Governor - Central Bank

The 59th STON Platform therefore and its implications for the national sought to explore and discuss the economy. He framed his presentation effects of the falling value of the in terms of economics noting that Ugandan shilling on the Ugandan Africans were “losing out” if debates economy to restore confidence among continued to focus on democracy the citizens and trigger production in and politics which, unlike economics, all sectors of the economy. never “put food on the table”. Although the Ugandan shilling had depreciated by 24% against the dollar, Presentations Mr Muhakanizi noted that Uganda was not alone as the strength of the dollar had also weakened other regional and Mr Keith Muhakanizi, Permanent international currencies5. He attributed Secretary and Secretary to the wide-spread currency depreciation the Treasury of the Ministry of to the flow of capital back to the United Finance, Planning and Economic States of America following the financial Development crisis in Europe and increased trade Mr Muhakanizi presented the position in emerging markets which served to of MoFPED and discussed the strengthen the dollar. For Uganda, Mr depreciation of the Ugandan shilling Muhakanizi noted that four shocks had impacted the strength of the shilling. First, global commodity prices had weakened and the drop in coffee, tea, oil, mineral, and gold prices had impacted on , generally. Second, South Sudan (a key trading partner with Uganda) had collapsed, resulting in lost business and economic opportunities. Third, low oil prices had impacted potential revenue from investors, resulting in slowed commitments to invest. Finally, the GoU (previously a foreign exchange earner) was and remained a net foreign exchange user, thanks to foreign investments in infrastructure and a subsequent commitment to trading in dollars. Image 1: Mr Keith Muhakanizi presenting at the 59th State of 5 Mr Muhakanizi cited , , Canada Nation Platform and Japan, amongst others

3 DEPRECIATION OF THE UGANDAN SHILLING: IMPLICATIONS FOR THE NATIONAL ECONOMY

Image 2: A cross section of the speakers at the session, from L-R Mr Issa Sekitto - KACITA, Mr Ben Mungyereza - UBOS, Mr Edmond Kizito (Chair), and Mr Keith Muhakanizi - Ministry of Finance, Planning, and Economic Development The impacts of the depreciation of In his closing remarks, Mr Muhakanizi the shilling included higher inflation, explained that the depreciation which Mr Muhakanizi speculated was of the Ugandan shilling was not likely to be greater than originally wholly negative because the current anticipated, as Central Bank had to depreciation meant that net foreign tighten regulations on the market. currency earnings had become Contrary to speculators who predicted competitive, leading to the completion that the GoU would overspend as of some key projects in, for example, a result of elections, Mr Muhakanizi South Western Uganda. Moreover, explained that GoU expenditure was investments in coffee growing on track with a net saving, although were increasing as a result of the GoU Reserves were slightly lower. depreciation of the shilling. His final advice was for Africa to redirect efforts The increase in interest rates was towards exports and foreign exchange anticipated to absorb the shock to earnings and avoid “lamenting about the private sector and result in lower deprecation”. Gross Domestic Product (GDP) growth than anticipated as imports became expensive due to the depreciation of Mr Ben Mungyereza, Executive the shilling. As a result, Ugandans Director, Uganda Bureau of should expect a decrease in the Statistics total number of imports, despite their necessity for economic activity. Mr Mr Mungyereza discussed the effect Muhakanizi predicted that foreign- of the exchange rate on core inflation6. exchange users (particularly net import UBOS statistics demonstrated a clear foreign-exchange users) were likely to relationship between the exchange suffer the biggest losses as a result rate and core inflation elements; of the depreciation of the Ugandan shilling while net foreign-exchange 6 Core inflation elements are those which do not earners stood to benefit. include all volatile elements of inflation such as food crops, electricity, fuel, and utilities

4 59th Session of the State of the Nation Platform using a simple test of correlation, Mr an economy that is three times more Mungyereza explained that when the import-led than export-led cannot be official mid-term rates of exchange sustained, as evidenced by the impact and core inflation elements were of the shocks. plotted, they moved together in the One key area that Mr Sekitto identified same direction. as “neglected”’ was agriculture; yet The perceived connection between the to receive anything in excess of 4% exchange rate and inflation, according of the national budget for the past to Mr Mungyereza, was however 10 years. Despite exporters having a “spurious” given that the exchange comparative advantage, deliberate rate went up in May/June whilst core planning of the agriculture sector in inflation only showed a small increase infrastructure and electricity has been from 4.6% in April to 4.8% in May to lacking. 4.9% in June. The increase in core In order to compete in global markets inflation, according to his analysis, was and enhance comparative advantage, likely due to food crop inflation which Mr Sekitto recommended that a year jumped from negative 0.1% in April to be devoted to the agriculture sector, about 6% in May. with a focus on increasing budgetary In his concluding remarks, he noted allocation and pursuing actionable that the exchange rate impacts the ideas in developing the sector. economy in multiple ways, including Mr Sekitto explained that trading sector through core inflation and food crop activity had declined partly due to an prices. Although averse to predictions, increase in Central Bank rates, which Mr Mungyereza concluded that the forced commercial banks to increase effects of exchange rate were being rates on existing loans. This negatively felt with a lag and may yet cause impacted borrowing which would higher inflation. otherwise have been used to partake in economic activities that would have boosted the economy. The increase in Mr Issa Sekitto, Spokesperson, rates by Central Bank as a response to Kampala City Traders Association the shilling depreciation thus reduced Mr Sekitto provided an overview of economic activity among traders. The the challenges faced by the trading community which he described as “suffocated with low economic activity” as a result of the shilling depreciation. Agreeing with comments made by previous speakers on the need to increase Uganda’s exports, Mr Sekitto highlighted the trade imbalance where imports accounted for three times the exports which resulted in a permanent trade deficit. The imports of raw materials and finished goods (with 60% of goods for the manufacturing sectors also being imported) meant that traders and Image 3: Issa Sekitto of Kampala manufacturers use the dollar “more City Traders Association making his than people think”. He explained that remarks at the session.

5 DEPRECIATION OF THE UGANDAN SHILLING: IMPLICATIONS FOR THE NATIONAL ECONOMY local economy in Uganda was also In particular, he highlighted the issue of impacted by violence in South Sudan “hiding” dollars to insulate them around as trade and business opportunities election time and recommended it shut down as a result of the conflict. was necessary to look at domestic Ugandan traders did acknowledge, mechanisms for “injecting” dollars into however, that the Ministry of Finance the local economy. had tried to support Ugandan traders amidst difficult times. For example, business compensation was being Dr. Stephen Isabalija, Board organised with the Government of Member, Uganda Development Kenya pledging to compensate the Bank property of Ugandan traders destroyed Dr Isabalija discussed ways to in 2007. improve the Ugandan economy with The depreciation of the Ugandan a “blunt look at the fundamentals”. shilling had further been impacted The “dollarization” of the economy, he by the policy of permitting multi- said, had revealed that Uganda did national companies to own 100% of not control the US Dollar despite the their shares. This, to Mr Sekitto, was national economy being measured a risky policy because dividends were against it and despite moves by the not paid in Ugandan shillings and BoU to “control” the dollar by injecting earnings would likely be spent beyond cash into the economy. Dr Isabalija Uganda, particularly during election agreed with previous speakers that time7. Mr Sekitto recommended increasing exports would address that the GoU ensure that adequate economic shortfalls to balance economic interventions were adopted payments and “‘fight” the dollar, but with locally appointed directorship that this required a concerted effort. He able to take a 30% share of dividends noted that for the last fifteen years, the for re-investment into the Ugandan shilling had not been strong enough to economy. The ease with which foreign do this effectively. investors could operate was also Furthermore, the cost of borrowing highlighted by Mr Sekitto who argued in Uganda was so high that local that Uganda was “importing importers” investors, farmers, and traders were rather than attracting businessmen who added value. He stressed that transparency in liberal markets does not mean “nakedness” but that the GoU needed to contain and regulate direct foreign investment which would require restrictions on how much foreigners were investing and what they were investing in. In his concluding remarks, Mr. Sekitto noted the difficulty of retrieving US dollars.

Image 4: Dr Stephen Isabalija

7 Presidential are scheduled discussing the presentations at the for February, 2016 session

6 59th Session of the State of the Nation Platform unable to borrow money due to high Public investment in infrastructure for rates of interest on loans. Despite agriculture would require a tactical global competition with the dollar, review of the resource envelope that interest rates in Uganda were much targets direct investment and prioritises higher than in the United States of infrastructure to ensure value-addition America (0.05%) and Europe. Dr in the sector. Isabalija attributed this to a failure by the GoU and BoU to invest in access to money, necessary to stimulate the Conclusion economy during hard times. In his closing remarks, Dr Isabalija The plenary discussions provided stressed that stimulating the economy deep insights into possible mitigation did not mean increasing interest rates. measures to address the depreciation Instead, it meant spending in priority of the Ugandan shilling. A number areas such as agriculture and energy of proposals were made on how to which required that the GoU prioritise strengthen the economy against spending and adopt an effective future shocks and discussions monetary policy to build the economy focused on investing in the agricultural of Uganda. sector, increasing exports, and restoring confidence in the economy. Participants also noted that traders Hon. Evelyn Kabuule, Vice- were affected by the policy of the Chairperson, Committee on Uganda Revenue Authority (URA) National Economy, Parliament of wherein taxes were calculated in US Uganda Dollars although traders were required Hon. Kabuule focused her discussion to pay in shillings, thereby losing on addressing rumours surrounding the out due to the depreciation of the “expected, potential election monetary Ugandan shilling and unfavourable expansion” involving large amounts foreign exchange rates. Discussions of money moving around in response also addressed the need for regional to the 2016 Presidential Elections, conflict resolution in South Sudan to scheduled for February. She noted improve the Ugandan economy and that all expenditure is tallied against allow leaders to redirect their focus to a budget, although expenditure could regional integration and engaging the be “squeezed” to make savings. Given youth in promoting economic security. that Mr Muhakanizi would not permit the printing of money, she articulated her uncertainty as to where this money Policy Recommendations would come from and proposed that, if the shilling was to collapse, a realistic monetary tool would be best suited to • Invest in the Agriculture Sector: address the situation. A recommendation that a year of investment in agriculture to Echoing the sentiments of previous develop the agricultural sector speakers, Hon. Kabuule reiterated the was made. The focus of such a need to invest effectively in agriculture, year would be on value addition in adding that a focus on value addition order to meet global standards for would be necessary. Without electricity export to the international market and good roads, the ability of Ugandan with investment in infrastructure to farmers to add value to agricultural support production. produce for export was restricted.

7 DEPRECIATION OF THE UGANDAN SHILLING: IMPLICATIONS FOR THE NATIONAL ECONOMY

• Promote Exports: Participants instead of increasing interest reached consensus on the general rates to the detriment of need to promote exports. The the national economy and pursuit of import substitution Ugandan traders, investors, and export promotion was and businessmen. Investment recommended; particularly for in the agriculture sector and strengthening agricultural exports supporting infrastructure was and to address barriers to exports recommended in order to add on the international market, value to products for export. currently hampered by the poor Ensure that Multinational quality of goods. o Companies Contribute to the • Review Out - Dated Policy: It was Ugandan Economy: It was recommended that GoU needed to proposed that GoU needed to prioritise its spending by adopting review the policy on liberalized an effective monetary policy to foreign exchange and ensure build the economy. The following that multinational companies recommendations on monetary contribute to the Ugandan policy were made: economy either through local directorship, shareholder Reviewing Economic o dividends, or similar Stabilisation Policies: The arrangements. current economic stabilisation policies have been in place o Increase Market Transparency: since the 1990’s and were Consensus was that the GoU designed to address prior needs to contain and regulate macro-economic instability direct foreign investment for the and high inflation. These sake of developing Uganda. policies needed to be reviewed For example, it was noted that to refocus policy towards most taxes come from imports economic growth. and it was unclear how much of that tax was being used to Protect and Invest in Ugandan o promote import substitution Workers: Securing access to and export promotion. low-interest loans for Ugandan traders and buffering local o Account for Non-Tradable economies from the volatile Investments: Public exchange rate by offering investments need to be protection to tenants who are calculated according to ‘cost forced to pay rent in dollars and return’ balances for non- was recommended. Adopting tradable investments, such as youth livelihood schemes to roads and shopping malls. support productive youth to • Address Project Delays: start businesses was also Participants noted that delays recommended. in big projects had postponed o Increase Spending in Priority investment dividends and it was Areas: It was agreed that recommended that projects need the GoU needed to increase to be fast tracked to stimulate the spending in priority areas economy with attention paid to to stimulate the economy securing local content and financial retention in the local economy.

The full report on these findings can be accessed on ACODE’s online information center at: Advocates Coalition for Development and Environment Plot 96, Kanjokya Street, Kamwokya. P. O. Box 29836, Kampala. Tel: +256 312 812150 Email: [email protected]; [email protected] Website: www.acode-u.org