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 was slightly lower than the Sh44.5 billion realised over a similar period of 2008, according to Central Bank of Kenya (CBK) data.

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.

Local manufactures who export their bulk of their products to Uganda have begun to feel the pinch of the currency fluctuations, and fear losing market share should the trend persist.

“We used to sell a lot of steel in that market but the orders have since dropped by close to 50 per cent because of the currency issue. The buyers there cannot afford the extra costs that have come with the performance of their local currency against the dollar,” Mr Narendra Raval, managing director of Devki Steel Mills said.

“We only hoped we had a common currency situation so that everyone played on a common field in terms of trade. The situation is real bad and we only hope thing stabilise.”

Similar sentiments were echoed by Mr Steve Smith, the managing director of Battery maker Eveready East Africa.

“A lot of people are already feeling the pinch of the currency situation both in Uganda and Tanzania where the respective local currencies have dramatically weakened against the dollar.”

Currency traders in Uganda expect the weakening of the Ugandan shilling against the Kenya unit and the dollar to persist on increased demand for the greenback.

“The market is still pointing to a weaker shilling (Uganda). We expect the trend to continue due to a buildup in corporate demand,” Mr Denis Mushabe Mashanyu, a trader at Standard Chartered Bank Uganda told Reuters on Tuesday.

This means that Kenyan manufactures will continue to find it harder to compete against products that have been made in Uganda.

Mr Polycarp Igathe, the managing director of Haco Industries however said the challenges caused by Uganda currency fluctuation against the dollar had been substantially tamed by improving economic prospects.

“For us we haven’t seen much in terms of reduced demand because of the currency situation. We feel that a strong economic growth rate in the Ugandan economy has improved the purchasing power of consumers and many can afford to buy the products,” added Mr Igathe.

The effects of the weakening of the Uganda currency against the dollar and the Kenya shilling have persisted since last year.

For instance last May, the Ugandan currency hit a decade low against the Kenyan currency, having shed nearly 30 per cent of its value against the Kenyan currency to stand at USh29 to the Kenyan shilling.

At the time, analysts pointed that the effects of global credit crunch- hit economies which are dependent on foreign aid and tourism earnings such as Uganda, eroded the value of their currencies and making it difficult for them to import goods and services.

“It depends on the product, if it is a product that is deemed as a necessity it will mean higher revenues for Kenyan exporters. If the products are not basic, they will look to get from cheaper sources or cut back on their consumption,” Mr Johnson Nderi of Suntra Investment Bank said.

A recent working paper published by the International Monetary Fund (IMF) said historically, the growth of East African countries has closely tracked global real GDP growth even though growth in the region seems to have trended upward since the early 1990s—to higher levels than that experienced by the world economy--real GDP

Growth in the region has generally been susceptible to fluctuations in world output growth.

Capital flows

“During global slowdowns, the EAC has generally been affected by reduced external demand for its exports, deteriorating the terms of trade prompted by declines in global commodity prices.
At times, the region has also been affected by tighter financial conditions abroad, particularly during episodes of financial crisis,” said the document titled: Spillover Effects and the East African Community; Explaining the Slowdown and Recovery.

It further said in part: “Global financial conditions have recently deteriorated to levels not seen in more than two decades.

As a result, a reduction or reversal in capital flows to the region, including foreign direct investment (FDI), is constraining investment and dampening growth prospects,”

The African Economic Outlook report says the prevailing global crisis has weakened growth in Africa cutting GDP growth by more than half, from an earlier projection of 5.7 per cent to 2.8 per cent in 2009.

The average growth rate for East Africa had been projected at 7.3 per cent in 2008, down from a very strong 8.8 per cent in 2007 but is expected to stand at 5.5 per cent in 2009.