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Depreciation of the Ugandan Shilling: Implications for the National Economy

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Depreciation of the Ugandan Shilling: Implications for the National Economy DEPRECIATION59th Session OF of theTHE State of UGANDANthe Nation Platform SHILLING: 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 Ugandan shilling depreciated to bring together key stakeholders against the US dollar by over 20%. for discussions on the likely impact Uganda, like many other economies, of the falling value of the Ugandan was struggling with the falling value shilling. Titled the “Depreciation of of its’ currency 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 shillings 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 Euro since in honest discussions about the the start of 2015. Second, there was a depreciating value of the Ugandan large increase in demand for dollars 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 Central Bank 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 currencies. 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 Bank of Uganda to try and prop up the exchange rate, at levels which are not consistent with supply and demand in the foreign exchange market, 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 Africa, 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 Kenya, Tanzania, 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
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