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Skyrocketing dollar versus shilling

By Patrick Kagenda

`I have the capacity to burn Forex speculators’ fingers’

As the world financial crisis takes center stage in all global discussions, The Independent’s Patrick Kagenda recorded Uganda Central Bank governor Emanuel Tumusime Mutebile’s answers to the press on why the American dollar has shot skywards and its likely impact on the economy.

The American dollar is appreciating against the Uganda shilling. Why is this?

The dollar is rising as a result of the adjustments in the global economy that are taking place consequent to the various rescue operations for financial institutions in America and Europe.

The best answer is that as a result of the restructuring that is taking place, there has been increased demand for dollars relative to other currencies. In the specific example of Uganda there is increased demand for dollars by those who had invested in treasury bills and those importing for Christmas, putting pressure on the shilling to depreciate. I can’t tell you to what levels the shilling will depreciate, I don’t know but as I told you for me the level of the shilling is not material, what is more important is whether we have been able to contain the depreciation so that other policy targets are met. I mean whether inflation remains the same or is reduced, whether interest rates remain the same or they are reduced. These are much more important than the level of the shilling. Of course the exporters will be extremely happy to see the shilling decline even above Shs 2000 to the dollar. They will jump with happiness if it went to 3000 to the dollar. On the other hand the importers are extremely angry.

Why has the shilling gone to that level and what is its affect?

The purchasing power of the currency is much more important than the level of the shilling. And that is affected by many other things like the rate of growth of the economy, the strength of the balance of payment, the structure of the economy. Those things are much more important when they are healthy than the level of the shilling against the dollar.

Uganda is agro-based. What impact will the dollar have on it?

The agricultural sector has been affected by the food bottleneck inflation. If there is a rise in food prices, farmers have more money, every thing else being the same. And if there is more money and everything else being the same, this will be an incentive for farmers to produce more. So there will be more food on the market and if there is more food on the market there is more food for export. And this should help the exchange rate. Export of food brings in foreign exchange thereby increasing supply of dollars or foreign exchange which should strengthen the shilling on the foreign exchange market. An increase in the price of food means there is higher demand for food than before the price increment took place.

Is government planning to intervene to stabilise the market?

I don’t think that anybody in Uganda who has participated in the reform of the economy has ever said that government should not intervene. I know out there, there are people who say that the market must be left to their own devices. That’s what has caused the chaos in America. Markets must be regulated and banks must be regulated. The absence of rules and regulations is what has caused problems in the world financial markets. I am glad that the West is beginning to understand that there is need for intervention in the way markets operate. Of course it’s a different thing to say, that you must put this type or that type of intervention in Uganda. But an intervention which says ‘I want to protect the public interest from excesses or from madness of markets’ that cannot be wrong intervention. And in Uganda, we certainly will not accept that kind of madness.

How are remittances and Foreign Direct Investment going to be affected?

It is not possible at this time to predict the quantitative impact of the reduction in remittances or reduction in FDI. It’s too early. We don’t have any basis for an estimate.

Does Uganda have a comprehensive plan in case it is affected by the crisis in the western counties?

I wish I knew comprehensively how Uganda will be affected. You know, even in the West, I was in Washington in early October when this recent crisis broke out, even they themselves did not know what would happen the following day let alone where it would happen, which bank would be affected, they did not know. Even the bankers themselves did not know which bank was next. The banks did not know the extent of the toxic debts, So, I can’t tell you lies, there is no comprehensive plan available but I can tell you that we are prepared to deal with any situation that may arise affecting the economy. The six and a half months of reserves is a big arsenal. Let me warn any speculators on the foreign exchange market. I have the capacity to burn their fingers and I will not hesitate to do so. Let them challenge me and they will have sleepless nights, not me.

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