Weaker Ugandan shilling poses threat to Kenya exports

The continued weakening of the Ugandan shilling against the Kenyan currency and the US dollar is making it difficult for Kampala importers to buy Nairobi goods, threatening to slow down the growth of exports to the neighbouring country.

Market data shows that the Ugandan currency has shed nearly 8.5 per cent and 7.9 per cent of its value against the Kenyan currency and the dollar respectively since the start of the year.

Apart from making it harder for Ugandan importers to buy Kenyan goods, it is improving the competitiveness of rival producers in countries such as Egypt which export to the neighbouring countries under nearly identical trade terms.

“The weakening of the Ugandan shilling makes products made in Uganda slightly cheaper compared to those made in Kenya,” Mr Vimal Shah, the managing director of Bidco Oil.

“But from an importer’s competitive view, the impact is neutral since we all sell in dollars, ” he added.

Uganda is the single largest market destination for Kenyan exports, having imported Sh44.4 billion worth of Kenyan goods in the year to November 2009, representing 13.3 per cent of Kenya’s total exports made over the period.

This is a pointer that local manufacturers are losing market share in Kampala since the Ugandan shilling stood at an average price of USh24 to the Kenyan shilling in 2008 compared to USh26 in 2009—a signal that local exporters sold less units since they could have generated more revenues on the stronger Kenya Shilling.

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

Normally, neighbouring Uganda makes their purchases of Kenyan goods using the US dollar— a currency against which the Ugandan shilling has also significantly weakened.

While the Kenyan shilling has lost 1.2 per cent to the dollar since the start of the year Uganda has lost 7.9 per cent to the dollar.

The weakening of the Ugandan currency against the dollar means that Ugandans are spending more to buy the same amount of goods as they did four months ago, posing a real threat to Kenyan businesses as Ugandans turn to their local products over exports and cheap imports from low cost exporters such as Egypt.

Though at face value a strong shilling indicates the strength of the Kenyan economy over Uganda, it is likely to leave exporters in a difficult position.

Besides exchange rate fluctuations, the competitiveness of Kenyan manufacturers in the regional market is already weakened by high production costs linked to factors such as the high cost of electricity.

As a result, in a business environment such as Uganda where consumers are becoming increasingly price-sensitive, low cost producer countries such as Egypt look set to edge Kenya out in the battle for consumers’ wallets.