What started off as a positive economic signal is forcing exporters to raise a red flag after a rapidly appreciating Ugandan shilling showing no sign of stabilizing. Close to six months now, the shilling has been riding high against the US Dollar pulling down gains made by the export sector while boosting the import market.

Although it made a temporary loss to the dollar on Saturday trading between Shs1900 and 1930, the local unit had spent most of the week at an average of Shs1,860 to the US dollar, having shed off Shs500 from Shs2,300, it last traded in mid May 2009.

Now experts believe the trend is likely to go on till end of the year propelled by increasing demand as consumers stock up items for the festive season. "The shilling appreciating is good for business. I have even resumed importing more goods which I had halted because I could not compete. I have stocked enough for the festive season," Ms Norah Kiwanuka an importer of ladies clothes and other accessories in Kampala said last week.

Experts in the money market attribute the budding shilling to the global economic recovery which has led to renewed risk appetite as demand for high yielding currencies in emerging markets increase. According to Standard Chartered Bank's-Foreign Exchange Trader, Mr Denis Mushanyu Mushabe, the markets expect the shilling to remain strong into the New Year if events in the global markets continue to look positive.

"Major players will keep an eye on events in Dubai as regards to the possible default by state owned company Dubai World which could have adverse effects on the world's fastest growing economy," Mr Mushabe said. The world economy has been watching recent events in Dubai after Dubai World, the company responsible for the supersonic transformation of Dubai, placed a request to its creditors to freeze its debt obligations for six months. The announcement momentarily dampened global market expectations and confidence. Dubai is one of Uganda's leading import destinations therefore any severe financial and economic vibrations could be of significance to trade between the two countries.

A consistently strong shilling, experts says, is disastrous for Uganda which is trying hard to add value to its export products to compete on the international market however, such a trend could scamper those efforts because exports become more expensive to international buyers.

"The appreciation is not so big and worrying to affect the country's annual exports," Ms Florence Kata, executive director of the Uganda Export Promotion Board - a body mandated to promote and facilitate the export sector, said.

Uganda's exports consisting mainly of agricultural products such as coffee, flowers, fish, tea and tobacco have little value added due to the backward industrial production thus not attracting premium prices.

Wagagai (U) Ltd is one of the flower-exporting companies which have started feeling the sting of the appreciating shilling.

"We had a big game around March-September when the local unit was rallying low against foreign currencies. Now that things are turning the other way; we are bound to feel the pitch on purchasing inputs whose prices have started going up," Mr Olav Boenders, managing director Wagagai said.

The company is one of the leading exporters of flower cuttings. It ships over 650 million tonnes annually earning about Euros6 million (Shs16.5 billion) turnover. The coffee sector - the country's leading export revenue earner - has not been spared either.

According to the October report from the Uganda Coffee Development Authority, despite a slight 11.3 per cent increase in volume output recorded, coffee revenue collected dropped by 10.8 per cent. Although expected to decline, fuel pump prices have continued to rise. Shell Uganda Country Manager Ivan Kyayonka said there is more that affects fuel prices than an appreciating shilling.

"This is a bit tricky because there are other factors that determine the final prices and these include sea pirates, infrastructure issues and logistics," he said, adding;"These issues are wiping away the privileges a final consumer would be getting through low prices".

International crude oil prices rose to about $76 a barrel last week as the dollar fell against major currencies. A weaker US currency makes dollar-priced crude more attractive for buyers using better-performing currencies.

In the coming days, transport fares are expected to rise as more people book in to travel upcountry destinations from the city.

Uganda Manufacturers Association's Executive Director, Mr Gideon Badagawa warned that if the local currency continues to appreciate further it will have a double sword impact on the economy. He said both importers of raw materials and exporters will suffer from the appreciation.

"Our appeal to Bank of Uganda is to ensure stability of the exchange no matter how low or high the currency may be. Predictability is very important," he said. He, however, expressed optimism that the situation will remain stable now that remittances from Ugandans working abroad have started coming.

Bank of Uganda has already indicated that it will continue to intervene in the foreign exchange market to minimise adverse instability and allow a gradual adjustment to the fluctuations by businesses. Speaking recently at an inaugural annual dinner for bankers in Kampala, BoU governor Prof. Tumusiime Emmanuel Mutebile said the bank would regularly intervene using "every device at our disposal" to stabilise aggregate demand factors.

In the meantime, importers are merrymaking. "We are now using fewer shillings to buy dollars; if the situation continues to be stable, it will trickle down to the final consumer in form of low prices on commodities especially during this festive season," Mr Issa Ssekito, the spokesperson of the Kampala City Traders Association said. The US Dollar on the other hand continues to weaken in its 14th month against all major currencies.

Foreign reserves

Foreign exchange inflows from offshore investors, earnings from agricultural proceeds and unwinding of the long dollar positions held by the several commercial banks helped the Uganda Shilling to appreciate against the US dollar by 4.4 percent in September.

This is the biggest jump in appreciation of the Uganda shilling in almost eight months, since the primary impact of the global financial crisis hit Uganda in the last quarter of 2008. Experts also warn that a persistent appreciation of the shilling could weaken foreign reserves, mainly held in US Dollar by Bank of Uganda. This would jeopardise the purchasing power of the country.

On a positive note however, a strong local unit also means that Uganda's external debt burden is manageable. Uganda's external debt burden has once again clocked $4 billion just three years after it was reduced from $4.7 billion to just $1.1 billion in March 2007 by the Multilateral Debt Relief Initiative at the July 2005 G8 Summit in Gleneagles, Scotland.

A strong shilling means Bank of Uganda would buy more dollars for fewer shillings to service the debt.

Domestic revenue

Domestic revenue has suffered more from inflationary tendencies than from exchange rate instability.

Low consumption patterns have had an impact on domestic collections causing a deficit at Uganda Revenue Authority.

"The inflation is still high and because of the effect of the economic crisis, people's consumptions patterns are still low. This has affected the domestic taxes like Value Added Tax," Mr Paul Kyeyune URA's, manager public and corporate affairs said.

In October, URA registered a net collection of Shs305 billion against a target of Shs354 billion posting a deficit of Shs49 billion. Deficit on gross domestic taxes amounted to Shs18 billion with a total collection of Shs158 billion. Direct domestic Taxes (PAYE, Corporation Tax, Individual income tax, Withholding tax and Rental income tax) performed at 79.02 per cent (19.37 billion deficit.) Indirect domestic taxes performed of 100.55 per cent, a surplus of Shs403 million.

International trade collections for October amounted to Shs167 billion registering a deficit of Shs25 billion which is 13.45 per cent in real terms.

In September, URA posted a Shs6.9 billion deficit. URA attributed the deficit to reductions in volumes of home-bound cargo which reduced greatly by approximately 48 percent.