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Why the shilling is weakening

Ramathan Ggoobi

Why the shilling is weakening

If the ’90s were a “coffee decade”, what’s Uganda’s main forex earner today?  

In May 1987 the Uganda shilling was devalued by 66% from Shs. 14 to Shs. 60. Back then there were two foreign exchange rates; the official rate and the black market rate. The official rate was Shs. 60 per each US dollar while the black market rate was Shs. 350 per US dollar.

At the beginning of 1990, the foreign exchange market was liberalised by legalising a parallel foreign exchange market and licensing foreign exchange bureaux deal in exchange transactions at market determined exchange rates. To eliminate the segmentation in the forex market and improve its efficiency, the interbank foreign exchange market was introduced in November 1993.

Twenty seven years later our exchange rates have come under strong pressure to depreciate. The dollar-shilling rate hit a record low of Shs. 2, 2011 and has remained as high as Shs. 2,683 per US dollar (February 20, 2013) despite Bank of Uganda’s efforts to sterilize it. Actually, it’s the BOU’s effort of accumulating reserves of foreign exchange which it depletes to meet the excess demand for forex that has helped us to avoid depreciation of our shilling at the “Zimbabwe rates”. But this sterilization is itself unsustainable.    

Conventional causes of rapid currency depreciation, at a rate our shilling has weakened, are on textbook: weak balance of payments, effect of global market volatility, low levels of productivity, increased speculation against the currency, political violence and uncertainty, and rapid demand for the foreign currency (notably the dollar) by citizens.   

International economics teaches us that a country with lower productivity growth in tradables compared with non-tradables experiences cannot avoid real depreciation of its currency. Looking at Uganda today, one wonders what we, the people of this Pearl of Africa, are made of! I have written about this before: how can a country, with leaders and institutions like a central bank, executive, parliament, and all those other semblances of a nation, fail to produce goods as simple as toothpicks? We are importing literally everything!

Our trade balance deficit has swollen to over $3 billion on account of declining export earnings yet import expenditure keeps on rising. It all goes back to government’s failure to support domestic production of tradable goods, especially agricultural produce. The 1990s were roaring as far as economic recovery is concerned. This was mainly on account of rapid growth in the agricultural sector, especially the coffee subsector.    

Negligence of the agricultural sector

While growing up, in the mid-1990s, I witnessed an economic revolution in my village Kitagobwa, Ngando sub-county, Butambala-Mpigi district. I vividly call to mind a short period of time in 1994/95 when our neighbours and my family made lots of money, built permanent houses, sent children to good schools, and did lots of other developmental projects. In short, this is the period I loudly recall as the time when the people of Butambala, and apparently other parts of Central Uganda, waved bye-bye to poverty.

Indeed this is the period when the poverty alleviation campaign registered the best results ever. Ugandans were making money, nobody was complaining, and few were interested in politics. As a schoolboy, I remember making more money trading in coffee during my school holidays than what I make today as a university don! That is how good the coffee boom of the mid-1990s was.

Mr. President, this coffee boom did not come by accident. No. The reform program that your government embarked on in May 1987, by addressing both macro and sectoral issues in agriculture, especially in the export crop sector, including coffee, accounted for the spectacular performance of coffee in the mid-1990s.

Splitting of the Coffee Board into two entities — the Coffee Marketing Board Ltd. and the Uganda Coffee Development Authority — in January 1991, is one example of the reforms and restructuring that took shape after the ascendance of NRM to power. And it is these policy reforms that led to high prices and efficiency gains which perked up coffee production and marketing in the first half of the 1990s.   

Thanks to government negligence of the agricultural sector, since 1997 the performance of Uganda’s coffee industry has been disappointing. When your government, Mr. President, neglected agriculture, coffee was obviously the first victim as you leaders jumped the World Bank wagon of developing every single country in the image of USA.   

Non-traditional exports!?

Since the turn of the new millennium coffee production levels have been at their lowest ebb. It is very unfortunate that government chose to neglect a subsector which was, and still is, the main source of income, estimated to employ over 500,000 households. We are talking of a subsector that used to fetch as much as $400 million of export earnings during the period when Uganda was doing wonders in the developing world — in the mid-1990s. Today, coffee contributes less than $150 million (equivalent to one-quarter of merchandise exports and 2% of GDP).

Shockingly, your economic advisers, Mr President, for selfish reasons have duped you into thinking that the decline in coffee’s (and by extension agriculture’s) share to GDP is an indication that Uganda’s industrialisation drive is on course, and that Uganda is developing.

Studies have indicated that coffee production has kept declining even when prices recovered after 2002. For example, in the 2005/06 season, Uganda’s coffee output was about 2.5 million bags, the lowest level since the NRM came to power. Reason? Farmers became frustrated beginning in 1998 and cut down coffee plantations. This was also not helped by the government’s unguided call to farmers to substitute coffee and other traditional cash crops with non-traditional cash crops, notably vanilla, simsim and pharmaceutical herbs.

And it goes without saying that these so-called lucrative non-traditional crops have failed considering their poverty implications to Uganda’s rural households. Mr. President, our farmers are becoming poorer with your government’s “high yield” non-traditional crops.

And as it is this government’s hobby to blame its failures on others except itself, we have always heard government officials, led by you Mr. President, blaming farmers for the declining coffee prices. You have always pointed at the declining quality of coffee as the cause for poor performance of the sector.

87% decline in coffee

Studies have shown that although virtually all reports on the Ugandan coffee sector have taken for granted that quality of coffee has deteriorated, none of these reports appears to have undertaken any detailed quantitative analysis in order to establish whether quality has actually declined.

Coffee industry representatives and exporters agree that about 95% of Uganda’s coffee delivered to the exporters’ processing facilities was clean coffee while the remaining 5% consisted of what is known as “foreign matter” such as bean defects, husks, leaves, pieces of wood, and stones.

And it is believed that this “foreign matter” content of coffee entering the exporter’s warehouses is attributed mostly to middlemen and not farmers. Even the International Coffee Organisation’s (OCO) robusta indicator shows that our coffee has never lost quality. Another measure of quality used on the international market is the share of low quality beans. Information on the composition of Uganda’s coffee production by quality and type indicates that the share of low quality beans produced has actually been declining.

So neither price data nor the share of low quality beans support the view that coffee quality has deteriorated in Uganda. Even coffee referred for reprocessing during pre-shipment inspection (another indicator of quality) has been declining. During the 1997/98 season, 424,660 bags were reprocessed while during 2003/04, only 54,197 bags were reprocessed (an 87% decline).

Mr. President, this talk of deteriorating coffee quality fronted by your government to defend its negligence of the coffee subsector in particular and agricultural sector in general must stop. Our coffee has never lost quality. Likewise this talk of your government’s pursuance of value-added activities in coffee is unlikely to have any effect on the welfare of coffee growers because roasters and instant coffee producers like Tata or Andrew Rugasira will pay the same price as exporters, so farmers are unlikely to receive a higher price simply because their coffee will undergo some transformation domestically.

Like I usually urge your government in these pages to go back to the basics, the only viable policy to secure a pro-poor growth model and recover the value of the shilling will in next unforeseeable future remain agriculture. And most importantly, coffee sub-sector remains the biggest feasible and profitable employer to our people. It is a sustainable cash crop although economists want to argue that its low income elasticity of demand makes it unable to take advantage of increasing household incomes globally. Granted, this theory sounds sensible but if the ’90s were a “coffee decade”, what’s Uganda’s main forex earner today.

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Ramathan Ggoobi

Ramathan Ggoobi is Policy Analyst, and Researcher. He lecturers economics at Makerere University Business School (MUBS) and has co-authored several studies on Uganda's economy. For the past ten years, he has published a weekly column 'Are You Listening Mr. President' in The Sunrise Newspaper, Uganda's Leading Weekly

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