Experts speak out on troubled economy

By Independent Reporter

Traders, manufacturers, consumers wait in vain for solution from government

President Yoweri Museveni’s solution for the depreciating shilling to the dollar, as enunciated in the press on July 6 is the correct one; bring more dollars into the economy and the shilling will stabilise. Unfortunately, his means of getting more dollars to flow into the economy – by selling future oil vouchers and waiting for tourists, might find the economy collapsed.

That is the implicit message the Executive Director of Uganda Manufacturers Association (UMA), Kigozi Sebaggala, had in an interview with The Independent. He said that the rising cost of importing inputs is pushing some manufactures on the brink of closure.

“Some of our members say they are planning to suspend production till the shilling gains value,” he said “Our raw materials that we import are expensive because of the expensive dollar, so our products are more expensive and as a result our sales have gone down.”

Joseph Kitone, Marketing Manager of Uganda Clays Ltd, told The Independent that the dollar’s appreciation had made the cost of furnace oil imported from Mombasa-Kenya unbearable.

“Our Kamonkoli tunnel kiln machine runs on furnace oil, which has increased the price per litre from Shs1,565 in January to Shs 2,190 in June,” Kitone said. At the time, the dollar that traded at Shs 2,350 in mid June had shot to Shs 2750 in early July, an increase of  Shs 400 or 17% in 20 days.

Obviously, UMA’s concerns demand some quick fixes. But if what happened at Bank of Uganda recently is a sign of the government’s response, then rule out any quick fixes and wait for more trouble ahead.

Bank of Uganda normally holds its press conferences in the Ground Floor conference room, perhaps to avoid having so many pressmen traipsing around its high-security offices. When it was taken to the Seventh Floor conference room on June 6, it was the first sign that something big was happening.

The room was packed beyond capacity; with journalists, cameramen, and central bank officials standing in doorways, tripping over camera equipment, jostling for seats, and braving considerable security detail and wait 45 minutes for the rare press conference by the Governor, Emmanuel Tumusiime Mutebile, his deputy Louis Kasekende and several directors.

At the reverent announcement that the Governor was on the way, a corridor miraculously appeared in this human maelstrom, leading straight to the head of the conference table where the governor’s seat had been reserved.

In the hallowed corridors of Uganda’s central bank, Tumusiime Mutebile is royalty despite presiding over what is now “the world’s worst currency”, according to Bloomberg data.

Mutebile still cuts an imposing figure although his reputation, as a straight-talking, efficient economic technocrat, who seems to do business with the establishment without being beholden to its politics, has taken a battering.

So what did he have to say about being in charge of the world’s worst currency in a country of taxi strikes, trader strikes, without electricity because the government cannot pay power providers, and the worst inflation rate in a long time? Mutebile said nothing.

Instead he conjured up a blue-skies setting in which he blissfully launched the bank’s next big thing – the new benchmark Central Bank Rate (CBR) which is at the heart of the central bank’s new inflation targeting framework.

At another time, the CBR could possibly have been exciting. It signals a shift from the Central Bank’s previous strategy of achieving monetary stability by managing money supply to monitoring and predicting the cost of money.

Unfortunately, it was launched at a time of great economic pessimism. The new policy was announced in the midst of the recent traders strike, the power crisis and transport paralysis caused by the taxi drivers strike against Utoda. These undermine investor confidence and productivity in local manufacturing and increase the cost of production.

They worsened the dramatic depreciation of the shilling, in which the central bank governor has played an important role, amidst other drivers of inflation like food shortages, local and international fuel prices, imported inflation from trade partners, and questions about government›s financial discipline (or lack of it) that prompted IMF censure.

Commercial banks had been raising rates the week preceding the new rate’s announcement – citing adverse market conditions, including depreciation of the shilling, which had dropped to 12% from Shs 2,350 to Shs 2,600 per dollar and precipitating a traders’ strike.

As a result, few believe that the Central Bank’s pursuit of tight monetary policy to rein in inflation with a debuted CBR of 13%, or two percentage points higher than its own overnight lending rate, will have the desired impact. It is designed to signal commercial banks to increase lending rates, in line with central bank’s monetary tightening stance, and ultimately curb inflation. Governor Mutebile says the bank will use its monetary instruments – like T-Bills, bonds, repos – to steer interest rates towards its target. The worry is that the commercial lending rate might hit the roof without bringing down inflation.

Part of the problem is that inflation targeting yields only long term results. The masses demonstrating over high food and fuel prices and a depreciated shilling want quick fixes.

Mutebile might still achieve his annual inflation target of 5% in 6-12 months. But with annual inflation at 16% by end of June and core inflation at 12.2%, the general public is running out of patience.

By the bank’s own observation, the supply shocks that have been driving inflation; the exchange rate, fuel prices, inflation in key trade partner countries remain unpredictable, and if they swung upwards, could still keep the rate of inflation out of the range of the target of 5 percent core inflation.

Perhaps traders should be listening to BoU’s Acting Executive Director of Research, Adam Mugume.

«We are not out of the woods yet,» Mugume said at the press meeting, “In the foreseeable future supply shocks remain unpredictable and all forecasts are subject to various risks.» By his projection, core annual inflation should remain between 10 – 12% while headline inflation is forecast to be in the range of 12 -14% in the same period.

In an interview, BoU’s Director of Communications, Elliot Mwebya, also told The Independent that “the situation is still bad but the central bank is working hard to control it”.

To the ordinary observer, these are more than ordinary risks in which to introduce a fundamentally new policy, one whose success relies on the market’s confidence. If by the end of the year or the middle of 2011 BOU’s targets and projections on inflation are so far off the mark of actual inflation rates in the market, it is likely that players would lose confidence in the bank’s capacity to predict and guide the market, which would be bad news for the CBR and the economy.

But Deputy Governor Kasekende says this is the perfect time for the new policy.

“The new framework is superior and was inevitable because of the changes in the economy because of liberalization and globalisation,” he says, “It is the best chance to stabilise the current volatility in the economy.

“We will make every effort to protect the credibility of the framework and the stance we have taken.”

Mutebile and Kasekende made their comments as if they were unaware that new Minister of Trade, Industry and Cooperatives,  Amelia Kyambadde, was facing her own acid test just 500 metres away at Nakivubo Stadium. Traders angered by the depreciating shilling and disgusted that she appeared clueless and offered not solutions, had walked out on her.

In the ensuing confusion, Kyambadde reeled off a string of promises she is obviously in no position to deliver, including stabilising the shilling in two weeks, kicking out illegal immigrants (the Chinese petty traders), and reviewing of licenses. Some of her promises were revoked in a couple of days of being made.

Mutebile’s failure to restrain the collapsing shilling was, of course, the main cause of Kyambadde’s troubles with the striking Kampala City Traders’ Association (KACITA) members. But he and his team made no mention of the traders strike.

For Amelia, especially, the traders strike has been a baptism of fire. The only tools she appears to have brought to the task seemed better suited to the intrigue-prone politics of State House than the shillings-and-cents calculations of business. Desperate to offer a solution where few expected one, the minister fell back to what is familiar from her experience in State House – divide leaders and led, blame the leaders, and initiate a rival group to neutralise the existing one. In all this she made Kampala City Traders Association (Kacita) her target, when she should have been focusing on the falling shilling. And failed on both counts.

Even a rumour that spread on day-one that the strike had been called off after a meeting between KACITA officials and President Museveni, fell flat. It was blamed on Kyambadde.

“The president is not in the country. How can you say we have met him,” Sekito said when consulted.

As traders in Kampala sat outside their locked shops on the first day of their two day strike, Edmund Bagumire, the vice chairman of Uganda Importers Exporters and Traders Association (UGIETA) was one angry man.

“If a big man like the governor says he’s not satisfied with government’s expenditure of foreign reserves, it’s clear that our economy is going to the dogs,” he said, “We are suffering; we cannot trade because foreign currency, especially the dollar is changing all the time.”

Bagumira had no kind words for government agencies like the Uganda Revenue Authority (URA), which base their valuations on the dollar, and were not considerate when the value of the dollar keeps rising.

“We traders are being hard hit by such high taxes because the taxable value keeps rising due to high exchange rates as does the tax payable thereon,” he said.

William Kalema, the Country Managing Director of BDO East Africa, a consultancy firm, and former chairman of the Uganda Investment Authority understands the pain of traders like Bagumira.

“Currency will always depreciate or appreciate – that is not the problem,” he told The Independent, “The real problem is how fast the currency depreciates, and recently it has done so over a very short time. What people want is stability.”

Unfortunately, Bank of Uganda (BoU), which is charged with ensuring monetary stability, seems unable to ensure it lately.

Almost ironically, all discussion of the shilling’s depreciation has tended to go back to the Governor of BoU, Emmanuel Tumusiime Mutebile’s fateful interview with the Financial Times – a newspaper whose global prestige and influence has in this case proven to be devastating. No matter his own prestige, not many believe Mutebile’s claim that he did not say what the paper said he said.

“I never said I was opposed to President Museveni’s policies or the purchase of military jets. I said the method of building the reserves which were being used for those purchases, which had been agreed before, had not been applied,” Mutebile told journalists at the press conference, “I also said that taxes from oil had been put on a separate account in the BOU other than the reserves account.”

“I don’t believe that what I said is what has caused problems for the shilling. What was put in my mouth is what has caused this,” he said.

For the record, the paper said the governor accused President Yoweri Museveni – and the Uganda government as a whole – of fiscal indiscipline and latent socialism, a fascination with big-project spending as opposed to services provision, and depletion of reserves.

Semantics, really. It is not out of character for the governor to be so bold. In retrospect, it appears the governor did not expect his statements to have that much sway – underestimating public and investor anxiety over the state of Uganda’s economy.

To be fair, the shilling has been on a depreciating trend since mid last year, dropping from 2,200 to 2450 in June, driven by a variety of factors from trade imbalance, international appreciation of the dollar, inflationary pressures local and foreign, and slow recovery from the rampant spending of the last election campaign. But the governor’s statements appear to have stoked panic among investors (and speculators) and pushed the shilling to Shs 2,700 per dollar in July, a low it has not seen in decades.

In all this, Maria Kiwanuka, the new Minister for Finance, Planning and Economic Development, has been unforgivably quiet. When she met journalists on July 4, she spoke luxuriously about how investments in agriculture and oil would increase foreign exchange and check the weakening shilling.

For the striking traders, collapsing manufactures, and the high price strung public, it must appear as if an economic earthquake is required to shake off Mutebile’s blunder, URA Commissioner General Allen Kagina’s alleged aloofness, Trade minister Kyambadde’s unsteady behaviour, and Finance Minister Maria Kiwanuka’s ball of wax. They will get it.