Global Crisis: Does Mutebile understand the economy?

By Patrick Kagenda

If the value of its currency is falling, fuel prices and inflation going up and an irrational indifference hits its securities exchange; is it realistic to say the economy’s fundamentals are ok?

Finance minister Ezra Suruma, Bank of Uganda Governor Tumusiime Mutebile, and Uganda Securities Exchange boss Simon Rutega say it is ok. But business people, capital markets traders, investors and the word on the street say all is not well with the Ugandan economy.

Even as world oil prices hit a 13-month low to trade at the US$60 mark on expectations of a deepening economic slow down, prices of oil products in Uganda were flying upwards.

Over the same period, the value of the dollar shot up by 30% from Shs 1,700 to the dollar to a new 12-month high of Shs 2,200 on the local forex market.

From an early October low of Shs 2,490 for petrol and Shs 2,350 for diesel, prices leaped by about 10% on average in the last week to close last month at Shs 2,700 petrol and 2,500 for diesel.

When asked why local fuel prices are rising when the international prices are crumbling, the spokesperson of Uganda fuel importers association and chairman of Shell U Ltd, Ivan Kyayonka said: The dollar price is shooting through the roof in Uganda; we buy all fuel in dollars.

There are other factors contributing to the rise in fuel prices, the hike in inflation, and the jitters on the USE. The recent decision by Uganda and Kenya to ban use of four-axle trucks on the roads, and the strike by truck drivers over bad parking in Ugandan yards at the Malaba border post all contribute to the slowing down in the volumes of products being imported.

Yet while addressing the media on the current world financial development, Central Bank governor Emmanuel Tumusime Mutebile said he believes that the impact of the credit crunch in advanced countries on the Uganda economy will be largely indirect.

Apart from possibly exchange rates, the impact will take time to be felt in the economy, he said.

Mutebile explained that this impact will be felt in a reduction in the demand for commodity exports, reduction in export and tourism earnings, donor aid, Foreign Direct Investment, and money remittances.

I dont believe that the credit crunch will impact on our financial sector, Mutebile said, Certainly the cause of that credit crunch was mainly the exposure of commercial banks and investment banks in America and Europe to toxic debts, this exposure will not affect our banks.

Our banks are subsidiaries of international banks in Europe and America and that means they have their own balance sheets and bank of Uganda is keenly monitoring the performance of these banks and we are convinced that none of these banks is exposed to the toxic debt arising from the sub prime mortgages crisis in USA.

He said local banks are well capitalised, operating within the requirements of the central bank.

On the exchange rate of the shilling with the dollar depreciating at a level far faster than usual, Mutebile said: This has been caused we believe largely by offshore investors from Europe and America dealing in government treasury bills and bonds who have decided to sell their investment  and get dollars and take them back home.

He said the proportion of the offshore investors in the total investment in government treasury bills and bonds constitute only 20%.

They can take their dollars without causing any serious problem to our foreign exchange market or for that matter to our economy as a whole, he said, The Ugandan economy is fundamentally strong.

Our foreign reserves are equivalent to 5.5 months of import which is a very strong arsenal to fight any of these pressures arising from the crisis in Europe.

But in Nakasero Market, just a few metres from Bank of Uganda where Mutebile spoke, Ms Ila Jamani, a mini-supermarket owner is already feeling the heat.

We have no customers as a result of prices shooting up, she mourns to whoever is willing to listen.

A 50 kg bag of sugar has swung from Shs 68,000 to Shs 78,000, sending the price per kilo spiraling from Shs 1,600 to Shs 1,900. A carton of wheat flour has shot to Shs 40,000 from 29,000-30,000, a 2kg wheat flour packet from Shs 3,000 to Shs  4,000,  Bisimati from Shs 170,000 to Shs 185,000 per bag.

When I increase the price people complain, Jamani says, They seem not to know that the dollar is up.

Abdul Sempa, a trader in the same area dealing in skimmed full cream milk has a similar story. He says traders cannot restock because the foreign exchange swing has wiped out their profit. A 50kg bag of skimmed milk from Kenya has since moved to Shs 230,000 from 190,000.

We have maintained prices so as not to scare away our customers, says Sempa, but once old stock is over we will have to revise the prices upwards.

I was very much disappointed when I heard the statement from the governor of the Bank of Uganda and the minister of finance who are unquestionable economists, says Mr Issa Ssekito, the spokesman of the Kampala City Traders Association (KACITA), Our economy is import-based. It doesnt need an economist to know what it means. We dont use Uganda shillings to buy them. If there is any problem with the dollar in the negative side things are not good.

He said exporters have agreements already signed and the rates of dollars are already stipulated so there is no excuse but importers will have to increase prices to match the dollar increment.

The low supply of commodities will force prices to automatically shoot up,” he said, “that shows how difficult the situation we are in now is.

What is complicating matters is that URA is valuing goods at the existing dollar rate further pushing prices up,” Ssekito said.

At Africa Alliance, Investment General Manager Kenneth Katikiro said investors will continue withdrawing their money for reasons related to the global crisis, in the short term which is next three to six months.

“We have to ride the storm,” he said, “global markets are like a ship turning. There is a lot of fluctuation and will take time to turn around, people should be prepared for it because it has a growing impact. This is time to buy shares when they are all low.”

At MBEA stock brokerage a trade and sales analyst Musa Nsubuga said the global crisis has had a psychological impact on the stock market. It has created panic on the market and every one wants to offload shares consequently collapsing the market prices.

Yet USE Executive Director Simon Rutega said the market is good and functional though in a bearish state.

“Prices going downwards will stabilise creating ground for buyers to have a good bargain. This has nothing to do with the financial markets turmoil. People need to appreciate the volatility of the market is not based on the fundamentals. Investors should have appetite for the market.  Â

Not surprisingly, as they navigate the high prices, Ugandans appear not to be listening to Mr Rutega’s optimism or Mr Mutebile’s claim that the current troubles are temporary. The market is communicating a different message.

Highlights

• The Kenyan government last month cut Value Added Taxation (VAT) and taxes on oil products and electricity by 4 percentage points in a major initiative to lower the cost of consumer products and the cost of manufacturing goods.
• An International Monetary Fund (IMF) mission led by Mr. Roger Nord visited Uganda October 20-31 and after meeting with ministers and top finance bureaucrats warned that “the international environment can be expected to be more challenging in the coming years, which may affect the financing of investment projects”.
• The International Monetary Fund (IMF) expects Uganda’s economic growth to dip to 7.0-7.5 percent in 2008/09 (July-June) due to high inflation and the crisis in global markets, it said on Friday.
• The Uganda Bureau of Statistics latest figures show that core inflation, which excludes food crop items, fuel, electricity and metered water, fell to 13.1 percent in October from 13.5 percent in September.Â
• Locally listed companies on the Uganda Securities Exchange have seen their value shrink due to reduced appetite and panic disposal of shares. Uganda Clays Ltd lost 22.22 per cent.