Weak shilling lifts Uganda’s uptake of Kenyan goods

Ugandan buyers of Kenyan goods are reaping a huge trade bonanza from the recent strengthening of the US dollar against the Kenyan shilling and the firming of the neighbouring country’s currency against the greenback that remains the global hub of money conversion.

The Ugandan shilling has since January, gained nearly 11 per cent and 16 per cent against the Kenyan shilling and the dollar respectively, reversing a slide against the currencies that began in mid 2008, raising concerns among Kenyan exporters that their goods would lose their competitive edge in the key foreign market.

Most of the world’s currencies are driven by their central value against the US dollar, and the Kenyan shilling’s slide against the greenback has seen it lose ground to any currency that is holding firm against the US dollar, including that of its biggest export market, Uganda.

Analysts expect the trend to continue in the short term, citing increased inflow of foreign direct investments into Kenya’s western neighbour that is mainly linked to the recent discovery of large oil deposits in the East African nation.

“The Ugandan shilling’s strength is linked to the increase in foreign direct investments which has created a high demand for the currency,” said Joshua Anene of Commercial Bank of Africa.

A rally of the Ugandan currency against the US dollar means that Ugandans are now spending less to buy the same amount of goods as they did five months ago, raising the prospect of a steady growth in Kenya’s exports to Uganda.

“This is positive change because a depreciation of the Ugandan shilling against the local currency and major global ones such as the US dollar has been hurting exports,” Mr Steven Smith, the managing director of Eveready East Africa, a Kenya based firm that services the Ugandan market, said.

“A stronger Ugandan shilling also stirs confidence in the ability of our biggest export market to take in more goods,” he said. “Such a shift in foreign exchange position also helps manufacturers to take a longer term position because it helps cool off inflation in the target market and gives Ugandan consumers more spending options.”

On Monday, leading commercial banks traded the Ugandan currency at 2,250/2,255 against the dollar from 2,250/2,260 on Friday, pointing to a continued good run.

“Market sentiment points to a stronger shilling on expected month end inflows. The shilling should trade within a range of 2,245/60 levels today,” Stanbic Bank Uganda said in a market report quoted by Reuters.

Uganda imported goods worth $542 million from Kenya in the year to April, representing 11.4 per cent of the country’s overall exports.

The performance was however slightly lower compared to a similar period of 2009 when Kenya moved goods worth $602 million, equivalent to 12.6 per cent of its total exports.

The dip in the value of exports in the year to April is linked to a steep rallying of the Kenyan shilling against the Ugandan currency that increased the cost of Kenyan goods eroding the country’s competitiveness in its top export market.

Kenya’s exports to Uganda include food, agricultural inputs, ores and minerals, metal products such as steel and iron, petroleum and its products, and liquefied petroleum gas (LPG).

Ugandan buy the imports from Kenya in dollars making the performance of the Uganda shilling critical in the cross-border transactions.

Currency dealers in Nairobi supported expectations of a firm run of the Uganda shilling in the near term, citing a gradual convergence of monetary policy positions by the central banks of the two countries.

“The two central banks are pursuing similar monetary policies in terms of interest rates and treasury bills hence the Ugandan currency has gained to reflect the same policy arrangements,” said Mr Andrea Balongo currency dealer with the Kenya Commercial Bank.

Analysts said that although the weakening of the Kenyan shilling against the Ugandan currency points to better economic prospects in favour of Uganda, Kenyan exporters are certain to emerge winners at least in the near term.

A strengthening of the Kenyan shilling against the Uganda shilling harms the competitiveness of Kenyan goods in the regional market.

This is because Kenyan manufacturers are already operating on a heavy cost base that is mainly driven by unreliable and costly energy sources.

A weakening of the Ugandan shilling makes products made in Uganda slightly cheaper compared to those originating from Kenya and the opposite happens when the Kenyan currency loses ground to the Ugandan shilling.

Besides the currency fluctuations in the region, East African states are expected to mutually benefit from the recently launched common market.

Kenya and other East Africa nations are expected to post the highest economic rebound in Africa this year alongside North Africa, thanks to increased trade with partners in the EAC common market launched in July.

East Africa is expected to post a 6.2 per cent growth this year and even clock a further 6.4 per cent growth in 2011 mainly driven by robust growth in Uganda and Tanzania.

“Kenya’s exports are likely to benefit from the expected global recovery and the increase in prices for some of Kenya’s main exports recorded in early 2010,” the Africa Development Bank (AfDB) and the Organisation for Economic Co-operation and Development (OECD said in recent economic outlook report.

“The impact of the 2009 fiscal stimulus, implemented by the government in 2009 will be felt throughout 2010.”

The AfDB and OECD expect the Kenyan economy to grow by 3.6 per cent this year, driven by positive sentiments both regionally and internationally.

Uganda’s economy particularly stands to undergo major changes following the discovery of oil in the Albertine basin.

The International Monetary Fund (IMF) reckons that Uganda’s oil strike could impact positively on the regional economy with sound distribution of the resources accruing from the business.

It could boost the purchasing power of the population and enhance their capacity to consume imported goods.

“Oil will bring substantial revenue, but only for a limited number of years. Channelling these resources in a careful and transparent manner is key to maintaining macroeconomic stability and raising living standards in a durable way,” the IMF chief of mission for Uganda, Martine Guerguil, said last month.

“In an oil-exporting economy, fiscal policy plays an even more central role in maintaining macroeconomic stability. It is thus all the more important to start putting in place processes that prevent the inappropriate use of public resources and raise Uganda’s ability to invest in itself,” the IMF said.