Fueling Poverty

21 05 2010

The American economy is rebounding.  Slowly, but it is rebounding nonetheless.  That’s good news, right?  Well, not necessarily if you live in the rest of the world.

The article below looks at the strength of the dollar against the Uganda shilling.  One of the key points it calls out is the fact that the price of oil is pinned to the dollar.  What that means is that, as the value of the dollar increases, so does the relative value of a gallon of gas.

In the U.S., the average consumer doesn’t notice it.  The price of a gallon of gas can be $3.00 no matter what the relative value is of a dollar.  If you live in dollars, there is no difference.

However, what if you live in shillings?  Over the years that I have been involved with Uganda, I have seen the value of the shilling range from 1,600 shillings to the dollar to the recent low of 2,200 shillings to the dollar, the lowest I have ever seen it.  That is a drop of over a third of the value of the shilling from 1,600.

The effect is the same as an increase in the price of gas from $3.00 to $4.00 – something that makes Americans go crazy.  But does that really matter in a country like Uganda where very few people even own cars?

Yes.  How do things get to the market?  By truck, which brings up the cost of everything.  How do people get back to their village for holidays or funerals?  By matatus, which take fuel, which means it costs more to get places.  At times it feels like Everything is tied to the cost of fuel.  And the cost of fuel is tied to the value of the dollar.

There are many ways that the increasing value of the dollar is good news for the world, as much of the world is invested in the dollar.  However, there is a more complex equation afoot, and what is good for America isn’t always good for the rest of the world.  As the dollar gets stronger, for much of the world, the margin for survival gets thinner.

Mark D. Jordahl – Kampala

Uganda shilling dips to year low
Thursday, 20th May, 2010

by Sylvia Juuko

THE shilling plunged to a new-year low against the dollar on Wednesday, crossing the 2,200 mark as the greenback maintains its strengthening streak against major currencies. This has fueled concerns about its impact on local prices.

Dealers said the shilling traded at 2,200/2,210 per dollar on Wednesday compared to 2,155/2,165 a week earlier. However, it eased to 2,202/2,207 yesterday morning.

The shilling was last at these levels in May last year amid the global economic crisis. It crossed the 2,100 mark in March this year.

The depreciation was attributed to a rise in dollar demand from corporate clients in the energy sector and the general strengthening of the dollar against major global currencies due to the Euro zone troubles.

“Markets are jittery about the Euro zone debt crisis that has led to investors to rush into dollar assets. This has filtered into our currency markets, exerting more pressure on the shilling,” said Rogers Lutaaya, a trader with Bank of Africa Uganda.

Dealers said the shilling was likely to remain under pressure due to huge demand in the market amid tight dollar supply.

“If the global risk aversion continues, the shilling might maintain a weak trend,” said Lutaaya.

East Africa’s regional currencies continued to be battered by the dollar, with the Kenyan unit also hitting a one-year low on Wednesday to trade at Ksh79.30/50.

The Tanzanian shilling traded at Tsh1,456/1,470 per dollar, compared to 1,406/1,415 the previous Wednesday.
The business community has in the past warned that the sharp appreciation of the dollar will strain profit margins and force them to increase prices.

“The cost of inputs will rise, but it the consumers that will suffer. If the exchange rate movements become inflationary, income will take a hit and people will have less disposable income,” said a manufacturer.

A strong dollar has already pushed pump prices up because the cost of the product and transportation are paid for in the US currency. The price of a litre of diesel is now selling at sh2,340, while petrol is sh2,900.

“Nearly two-thirds of the cost of getting the fuel products is paid for in dollars.
“If you have a weak shilling, the cost of fuel will inch upwards,” said an analyst.
And since fuel is an input into every product, the continuing weakening of the shilling will trickle down to all products, analysts explained.

The Central Bank usually intervenes in the foreign market to smoothen out currency movements.

It intervened on Tuesday this week with an estimated $5m-$10m on the sell side.
The dollar has been appreciating against shilling for most part of the second quarter of the year, mainly driven by a combination of corporate demand, banks building long dollar positions and offshore investors moving away from government securities whose interest rates are at an all-year low.

The Central Bank has in the past favoured a weak shilling in line with its stance of leaning against an appreciating exchange rate to boost demand in the economy.

Other currency dealers say with an election year looming, the local unit was likely to face more pressure.

“The coming election year poses a risk. People will buy and hold dollars due to the uncertainty.

“This is likely to put more pressure on the shilling in future,” said a currency trader.
Economists say while a strong shilling favours exporters, importers are hurting because they will need more shillings to purchase dollars.

“No policy makes everyone happy.

“A weaker shilling supports exports, making them more competitive,” said the economist.

But a weaker shilling may have an impact on the economy since the country is a net importer. This will make imported commodities more expensive.

The source of dollar inflows has been mainly the Central Bank foreign exchange sales, offshore clients and non-governmental agencies, but they have slowed down, while demand remains strong.

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22 05 2010
Tweets that mention Fueling Poverty « Wild Thoughts from Uganda -- Topsy.com

[…] This post was mentioned on Twitter by The Free Market, Trail of Hope. Trail of Hope said: Fueling Poverty « Wild Thoughts from Uganda: Fueling Poverty. Posted by Mark Jordahl on May 21, 2010. The American… http://bit.ly/ce3Cq4 […]

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