Understanding the impact of a weak Uganda shilling
What does a weak US $ against the Uganda shilling mean for;
The growth of Uganda’s tourism industry
The growth of our economy?
Disclaimer: this article is too simplified ideal for a beginner.
Around December 2013, the US $ exchange rate against the Uganda shilling went the wrong way for the US $. Around June 2013, (one unit of US dollar) US $1 was being bought at Ugx. 2,700. This meant that the US $ was very strong (one needed 2,700 Uganda shillings to buy just one dollar!) As time went by, around December 2013, the Uganda shilling became strong, i.e. US $1 was being bought at Ugx. 2,500 (this time around, one needed just Ugx. 2,500 to buy US $1, that is a saving of Ugx. 200. So you have the dollar you needed, and some balance to buy your lovely chapatti). Around Christmas, it hit an all-time high of Ugx. 2,400 – a dollar was now going for just 2,400 from 2,700 in June.
Now you understand what a high/ low foreign exchange rate means.
The same concept applies to any other foreign currency. If I am in Uganda, and intend to travel to Kenya, I may want to buy Kenya shillings here in Uganda (which will increase the demand of Kshs, and could increase the Kshs exchange rate against the Ugx.)
The foreign exchange regime in Uganda is liberal. It is determined by the forces of supply and demand. And as a result, the rate will keep swinging depending on the strengths of the economy. For example, during this time, the US $ is so scarce in South Sudan. To just get US $1, one has to spend so much of the local currency, as the oil which bring in the dollars, is not coming out!
Ok, the rate will go up or down based on the demand and supply, what next. Once in a while, Bank of Uganda, the regulator, might come in to try and stabilize the exchange rate by using instruments like selling and buying of treasury bills, etc.
You see, December is a holiday season when many Ugandans in the diaspora descend the country to spend the holidays with their relatives. This same period is characterized by harsh weather conditions in some parts of USA and Europe (if you have been watching international news, you understand what I mean).
The point is: many tourists come to Uganda and bring with them a lot of United States Dollars (US $) into the economy.
You see, to buy food, pay for accommodation, drink water or use the services provided by local Ugandans, your visitor from America with US $s need to change them into Uganda shillings, the latter is the accepted medium of exchange in the local market. That is why, service providers who insist on receiving payments in US $s distort our economy.
Impact of a weak shilling on tourism
A weak shilling makes foreigners (tourists or people with foreign currency) to need few dollars to survive in Uganda, and therefore it is attractive to them. If US $1 can be exchanged for Ugx. 3,000 for example, it means you need only a dollar to buy a meal upcountry, as it costs that much. On the other hand, a strong Uganda shilling makes it expensive for tourists to survive in Uganda, as they need more dollars to buy for necessities.
A weak shilling in addition of being attractive to tourists, it tends to discourage locals from travelling abroad, as it becomes expensive for them to survive out of Uganda due to their weak currency. A weak currency tends to drive local tourism.
In the next issue, we consider the impact on the economy.
Have any finance question, just ask here.
You will get the best answer in easy to understand language.
Copyright Mustapha B Mugisa, 2014. All rights reserved. You are free to share with appropriate attribution.