KAMPALA, UGANDA-The failing shilling coupled with the increased taxes in the budgets of the Partner States of the East African Community (EAC) presumably indicate that the consumer will have to dig deeper into the pocket in order to meet the higher cost of products.

For example a person buying a kilogramme of maize flour will pay higher than what he or she has been paying when the taxes start biting as the new financial year opens.

This is because the adjustment in the cost will be reflected at every stage of transaction. Take for instance a maize farmer who has to purchase seeds at a raised cost. The additional tax on fuel will mean increased transport costs thus raising the cost per kilo of raw maize.

The wholesaler/stockist’s and the transporter will pass on the increment to the processor who will in turn push the additional cost to the wholesaler/retailer culminating in a higher off the shelf price to be borne by the consumer- the final “victim”.

The new taxes on fuel in the budgets will also impact on the costs of goods and services. Take the case beer whose tax was increased. Many ingredients in its brewing are imported. If the cost of buying a US Dollar is has gone up as the Shilling struggles and at the same time another tax is imposed on the same product, this will mean a further increment in the cost of that product.

In May 2015, Kenya started the search for a new governor after the retirement of Prof. Njuguna Ndungu. Taking over from him with is Mr. Patrick Njoroge, a former IMF Executive. His immediate task will be to tame the runaway Kenyan Shilling. And it is not his problem only. In Uganda and Tanzania, the central banks are faced with a similar challenge – taming the currencies against a runway Dollar.

By mid-June 2015, statistics indicate that the Ugandan Shilling has depreciated against the Dollar by 23.5% over the last 12 months while the Kenyan Shilling by 11.3%, the Tanzanian Shilling is down by 25.8%. It could be worse for Uganda, which has seen the depreciation nearly approach the 25% mark.

The depreciation comes at a time when the finance ministers in the region were reading their budgets. In Uganda, Finance Minister Mr. Matia Kasaija was concerned at the rapid depreciation of the Shilling but presented limited options on how it could be saved.

“We import more than we export. Therefore, the increase in demand for foreign exchange to meet the import bill leads to a weak Uganda shilling,” he admitted. Uganda’s import bill continues to surge, which piles pressure on the demand of the scarce greenback. In the region, Uganda imports more than it exports compared to its neighbours. The solution according to Kasaija is for Bank of Uganda (BOU) to control the volatility that is caused by speculators.

“The policy of smoothening the exchange rate movements will continue, in order not to cause undue instability in the business climate,” he adds. BOU’s options are limited. Intervening in the market constantly could deplete the Foreign Exchange Reserves that now stand at 4 months of import cover. That is within the regional target.

It was not surprising that over 100 traders in Kampala recently protested payment of rent in US dollars. The traders closed their shops and held placards, reading, “we are not in the US, why pay in dollars”, while other placards read “the higher the dollar, the higher our rent”. As of May 2015, BoU intervened selling USD11.5 million, made purchases for reserve build-up of USD84 million and targeted sales of USD 13.4 million.

The net impact of BOU actions was a purchase of USD 59.1 million. That means BOU’s target is to keep the reserves within the limit of 4months of imports.

Interestingly, after the UShs24tr Budget Speech, the Uganda Shilling depreciated by almost 4% in one week. This, a signal from the markets that the confidence in the Uganda Shilling is still dwindling.

This instability is already being felt. Prices of imported commodities from China and India – Uganda’s largest trading partners as of imports – are already rising. Rental prices have been rising, considering that some real estate companies hedge against the depreciation of the Uganda Shilling by pegging their prices on the Dollar.

Since businesses conduct their businesses in the local currencies, they end up paying more. These effects are felt by the consumer who has to pay for these increments.

According to BOU statistics, the Current Account deficit deteriorated to 687 million USD as at end April 2015 from a deficit of 422million in the preceding quarter. A stronger dollar would ideally mean Uganda could earn more from its exports. The statistics, however, tell a different story. Export earnings decreased by 2.7% to USD 691.6 million in the quarter to April 2015 while imports decreased by 2.3% to USD1.2million over the same period according to BOU.

“A deficit reflects an excess of imports over exports which point to competitiveness problems. On the other hand, however, one can argue that the current account that implies an excess of investment over savings, going forward this could point to a highly productive and growing economy,” says Mr. Stephen Kaboyo, Managing Partner at Alpha Capital Partners.

After the June 2015 Monetary Policy meeting, Prof. Emmanuel Tumusiime-Mutebile, the BOU Governor describes the implications of this depreciation as having passing-through effects. As a result, the bank has revised its inflation projection from 5% to between 7% and 8%.

“The exchange rate pass-through and strengthening of economic activity will exert further upward pressure on consumer prices in the medium term in the absence of further tightening,” Prof. Mutebile points out.

The tightening came. For yet another month, BOU adjusted the benchmark lending rate to 13% up from 12%. The expectation is that this will reduce borrowing and slow some of the demand for imports. In turn, this would reduce inflationary pressures.

In Kenya, the Central Bank reacted the same way and increased the lending rate to 10% from 8.5%. In Tanzania, the Central Bank opted against this option and instead increased the reserve ratio of commercial banks from 8% to 10% in order to tighten lending and stabilize the shilling.


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