The Economics Around The Current Shilling Debacle. Media commentators like the Andrew Mwenda's aren't telling Ugandans the complete truth when they say that a devalued shilling is good for us because it means cheaper exports and therefore more Ugandan exports. As if it is even that automatic.
If a European buyer imports two flowers from Uganda because he has his two buyers in Europe, no matter how low your price, he will still buy only two flowers. He would actually be wasting his money if he bought more flowers sply necause the price is low yet.he doesn't have the clients to sell them to. Some of our analysts in the media are discussing hand-picked theory without carefully studying the broader macro-economics picture. There are 3 elements that affect economies when currencies loose value: - Our debts in US dollars, - Our non-dollar exports, - And inflation. When the shilling falls, all borrowers in USD like the state and some businesses, will immediately come under more pressure in repaying US dollar debts. We will need more local currency than before in order to pay our already huge international debt. A significant extra economic burden. Secondly, they say exporters will benefit from a weak shilling as our products will be cheaper to international buyers. Yes, many export companies trade in dollars, but not all. A large percent of Ugandan exports goes to the Eurozone, whose currency is also depreciating against the dollar. Our exports to the EU might actually be more expensive for our European clients than usual. Thirdly, our economy is still import based at approximately 600 million US Dollars monthly while the exports are at only 200 million US dollars. A big deficit of 400 million US Dollars. This means that we will now have an even bigger shilling cost for our monthly imports. Therefore businesses will increase prices of imported products since they need more shillings to buy dollars for imports. y Inflation therefore ensues. So any expected benefits to Uganda might not actually exist. Instead GDP might stagnate or show negative overall. In summary, a falling shilling adds to our economies’ debt burden and also makes our non-US exports even more expensive. But crucially, if our currency depreciates, and inflation rises as explained above, it is our economy that is actually collapsing. The problem if prices rise uncontrollably, is that the market will start informally adopting the dollar since it is stable and available everywhere. The worst case scenario when such situations happen, is that Ugandans will find themselves paying their boda-boda fare, house rent, katogo, flat screen TV, chicken and possibly airtime, in US dollars instead of a useless depreciating shilling. We are still fairly safe from that at the moment, but ask Congo how a depreciating currency and a rampaging inflation led them to trade everything in US dollars. So we have to be ready to peg the Uganda shilling to the dollar or the Euro. This gives our currency stability and provides the strongest guarantee for predictable economic growth.
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