KAMPALA, UGANDA -If anything could go wrong for a country that imports more than it exports, it is the depreciation of the local currency.

The Uganda Shilling is one example of a currency that has taken a beating from the United States Dollar. In just January of 2015, it depreciated by 4% to reach UShs2940 per US Dollar. These are levels last seen in 2011, when Uganda experienced unprecedented double digit inflation. But the depreciation didn’t start in 2015.

How did we get here?

In February 2014, President Museveni signed the Anti-Homosexuality Act into law. The Nordic countries, specifically the Swedish Finance Minister Andres Borg warned of severe economic consequences for Uganda as the Act came into law.

“In my mind I think there are some unfortunate economic risks when it comes to discussions on aid. Uganda has a perception of being in a place where political statements that could be positive in attracting investments in the long term. But I think this is a situation that is creating reputational risks on the perception of Uganda,” Borg said.

A price was to be paid indeed. The Uganda Shilling in just one week took a tumble, shedding value by almost 4 percent. It hit the USh2600 mark. The Bank of Uganda (BOU)  intervened to prevent  the free fall by buying the dollars. In the 14 months prior to the depreciation, the Shilling had been making gains resulting in reduced volatility.

The signing of the law had led to a barrage of threats to withhold aid to the government. The cuts were miniscule but the threats had led to uncertainty, an admission Prof. Emmanuel Tumusiime Mutebile, the Governor BOU made at the time.

“There are potential risks of stronger inflationary pressures including those arising from possible further foreign exchange depreciation,” he told reporters in March 2014.

Riding on reserves of US$3bn – about 4 months of import cover – BOU was able to dig into them to reduce these pressures, a factor that Prof. Mutebile emphasised at the time.

“The bank is always prepared to intervene when it feels that the market is being destabilised. However, will always intervene whenever necessary,” he added.

By end of March 2014, the volatility had ceased. The act was being contested in the Court of Appeal. The bench of judges would later in a ruling of three to one nullify the Act for being passed without quorum. The Shilling then begun making gains on the Dollar, but only for a while.

In October 2014, depreciation made in a return and by Mid-November 2014 it breached the Ush2700 barrier. The factors for this second depreciation were considered to be both local and international. The peak shopping season had started and being an import led economy, led to a high demand for dollars.

This local factor is often experienced at the beginning of November through to the end of December. Often, the shilling depreciates, but rather gradually. This time, in one month the shilling had depreciated from an average of Ugshs2610 to Ugshs2750.

Stronger dollar globally

It has, however, come at a time when there is increased international demand for dollars. All other currencies like the Euro and Pound Sterling weakened against the green back on account of increased demand.

In the East African region, all the currencies have weakened, though not to the magnitude as that of the Uganda Shilling. The Kenya Shilling has fallen to levels last seen three years ago. In Tanzania, the situation is almost the same. According to Bloomberg, the current depreciation of the Uganda Shillings makes it the worst performing currency in the 48 African Countries whose currency they track.

The Financial Times was recently quoted as writing  “ the Uganda Shilling gets a shelling” considering how fast the currency has fallen.

The negative effects

From these factors, according to Steven Kaboyo, Managing Partner Alpha Capital Partners, are not a good sign for the dollar. Uganda does export at least US$209m monthly [September 2014] according to BOU statistics. This still dwarfs the US$545.84m monthly imports in the country.

The current account deficit is at US$489m in the second quarter of 2014 up from US$436m in the first quarter. The gains made from exporting coffee, tea and tobacco among others are offset by the increased demand for imports.

“Going forward, the reality is that currency headwinds are unlikely to turn into currency tailwinds soon because of the lack of strong fundamentals, primarily the current account deficit,” Kaboyo says.

Imported goods prices are on the rise. In Kikuubo, a busy trading area in Uganda and the hub of some of those imported goods, prices are on the rise especially for commodities like rice, electronics and shoes. For some of the traders, even rental prices have gone up.

One trader noted that they were previously paying Ugshs56m (us$19500) to the landlord in rent. His landlord charges rent in dollars. Now, he says he pays about Ugshs63m an increase Ushs7m) in rental fees each month. He sells to Ugandans in Uganda Shillings, meaning that he needs more shillings to pay the same rental fees in US Dollars.

Analysts have warned of the possibility of imported inflation as a result of the Shilling depreciation. The consumer pays the heaviest price in this instance as they have to pay more for commodities. Inflationary levels have so far been lower than projected, at least according to Uganda Revenue Authority.

Fuel prices would have increased by now, with the shilling almost shedding Ugshs300 since June 2014. The fuel price has been largely contained by the falling of global oil prices that have more than halved since the August 2014. This has kept fuel prices rather stable and falling by Ugshs300 since the start of 2014. The shilling depreciation impact on fuel prices is still one excuse the companies use to explain the sluggish drop.

“The other factor that also affects the price is the depreciation or appreciation of the Uganda Shilling. Our income is in Uganda Shillings, however, our purchases are in US Dollars  therefore when the Uganda Shilling depreciates this has an impact on the prices,” said Hans Paulsen the CEO Vivo Energy, the Shell Licensee in Uganda.

The real estate sector has also been hurt.

“The effect of this will be that finished properties will become very expensive especially for the average Ugandan whose earnings are fixed in local currency,” reads a statement from Lamudi, an online property services company

Adding, “The prices of rentals in the country are also bound to become unstable. Many rental prices are set in dollars and when converted into the local currency, these prices are unstable.”

Already, some companies are adjusting prices to cater for the depreciation. Pay TV subscription for DSTV have been increased by almost 4% as a result of the weakening Shilling.

Additionally, electricity tariffs are set to rise in the next three months, as the Electricity Regulatory Authority (ERA). In the quarterly review of power tariffs, the depreciating Uganda Shilling has been considered the largest contributor to the increment.

Are exporters benefiting?

Uganda doesn’t export as much as it imports. Our exports are dominated by coffee, tea, tobacco, fish, base metals and cotton. These are mostly formal exports that end up in Europe, the Middle East, China and USA. The exporters should be smiling; however the statistics from Bank of Uganda (BOU) indicate a fall in the value of exports in the first quarter of 2014/15. Exports fell to $623.69m in Q1 2014/15 from $678m in the Q1 of 2013/14.

For the tea exporters for instance, global prices have been depressed at least since June as a result of low demand especially from the Middle East. The fall in global prices of tea mean that the value of the tea exported is much less. The appreciation of the Dollar has been off-set by the falling prices of tea globally.

Avoidable situation?

In order to stem the depreciation of the Shilling, BOU has intervened several times. According to the market analysts, that has propped up the Shilling slightly to avoid it hitting the Ugshs3,000 mark. For some analysts though, the move by the Central Bank came a little too late.

The latest intervention was in the week ending January24 where the BOU intervened with an injection of US$45m higher than what it has been selling.

“Already panic has set in, and speculation is part of it. BOU should have been more proactive when the currency started moving,” says Kaboyo.

BOU had noted that the depreciation was being facilitated by speculators and their intervention in the market was partly to curb the speculators.

“…the Bank of Uganda has noted some speculative tendencies that have exacerbated the depreciation of the Uganda shilling. Therefore, the Bank will take measures to tame the depreciation arising from the speculative tendencies,” the statement from the bank reads.

In the long term, it has been noted that Uganda should boost the export sector if it is to benefit on a larger scale from the appreciation of the dollar.

Traditional exports like coffee remain dominant and efforts to boost processed “Made in Uganda” products are yet to yield the much needed results. Additionally, analysts point out that if Uganda could manufacture some goods, boost the textile industry and processed food, that would limit the number of imports into the country.

For now though, Uganda will continue to pay the price of a stronger dollar until some fundamentals in the economy are sorted.