Weakening shilling to affect budget

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Traders down town take a nap during lunch time July 6, 2018. A few who talked to The Uganda Vanguard say cost of doing business has increased due the depreciating shilling against the US dollar. (PHOTOS STEPHEN WANDERA)

                                                                                                                  By Ronald Mugobera

On 1st, July 2018 the implementation of the financial year 2018/19 budget commenced. The Shs32.702 trillion budget comes at a time when the Uganda shilling is losing value against major currencies more especially the Unite States dollar. The rate at which the shilling is losing value against the dollar sends the credibility of the budget in a dilemma as the planning figures are likely to lose their purchasing power at the actual time of budget implementation.

From July 2017 to April 2018, the shilling weakened against the dollar, depreciating on average by 3.0 percent, year-on-year, to Shs3,697.2. In July 2017, the shilling had depreciated by 6.6 percent year-on-year. The depreciation of the shilling was generally attributed to increased demand from oil, manufacturing and telecom sectors. By mid-day 2nd, July 2018, the dollar was buying at Shs3,874.74 and selling at Sh3,884.75 per dollar.

It’s quite unfortunate that the Ministry of finance did not indicate in all the budget documents and website the exchange rate at which the FY 2018/19 budget will be implemented.

The total budget for the financial year  2018/19 is Shs32.7 trillion approximately 32.12% of Uganda’s Gross Domestic Product (GDP) of Shs101.8 trillion (USD 27 billion). The works sector took the lion’s share of the total budget at Shs4,786.62 billion (19.08%). This was followed by the education sector at Shs2,782.57 billion (11.09%); interest payment at Shs2,514.11 billion (10.02%) and in the fourth position is the Energy sector with Shs2,438.20 (9.72%).

Apart from the education sector, all the high spending agencies highlighted in the FY 2018/19 budget consume imported inputs which therefore puts the demand for the dollar at a high level compared to the Ugandan currency.

From the budget speech, Uganda’s imports increased by 16.4% valued at USD 5.7 billion in the period 2017 to March 2018 from USD 4.9 billion over the same period the previous year. On the other hand, export earnings also rose from USD 3.59 billion in July 2017 to USD 3.93 billion in March 2018. From this, it is crystal clear that our balance of payments (BoP) is in a deficit. This shows Uganda’s high appetite to import than its ability to export in equal measure as it imports.

Uganda’s high spending agencies rely mostly on imports. Taking the works, security and energy sectors for instance, much of the capital needed to expedite their projects’ implementation are imported like capital machinery and equipment, oil meant to facilitate mobility of the factors of production and other necessary capital inflows. Unfortunately all these capital/machinery inflows are to be purchased in foreign currency while the Ugandan shilling will be left to circulate within the boundaries of Uganda.

With the high rate of depreciation of the Ugandan currency, it is likely to lead to inability of government ministries, departments and agencies to implement most of the projects as the purchasing power of the approved budget figures will have reduced by the time of implantation. Subsequently, MDAs are likely to ask for supplementary budgets on account of depreciation of the local currency.

To salvage the situation, Bank of Uganda (BoU) should consider both long and short term solutions as exchange rates affect economic activities in both periods-short and long runs.

Import-substitution industries should be enhanced by government. Much as government of Uganda has the Buy Uganda Build Uganda (BUBU) policy, there is much needed to be done to work on the quality of products put on the market to attract customers. The cost of doing business in the country like access to electricity needs to be addressed.

The government equally needs to enhance export promotion strategies to fetch more revenue for the country and also reduce on the BoP deficit. Uganda has got a comparative advantage in the agricultural sector. The dominance of coffee as Uganda’s leading export is a testimony to this. Other untapped export potential (non-traditional exports) should be identified to diversify our export portfolio. These however need to be of good quality to compete favorably on the global market.

In summary, the current rate of the shilling is expected to affect the FY 2018/19 budget credibility. This should be mitigated to avoid further depreciation of the local currency and enhance budget credibility within the country.

  The auther, Mr Mugobera Ronald has a masters in economist from the School of Economics-Makerere Universityb +256775120479/+256752082269 mugobera@gmail.com

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