Uganda: Ugandan Importers Reap From Fall in Kenyan Shilling

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The Monitor (Kampala)

29 August 2008
Posted to the web 29 August 2008

James Makau

The sharp drop in Kenya's earnings from tourism and a sluggish growth in commodity prices is stacking up through the hub of the US dollar to a bonanza for Ugandan buyers of Kenyan goods.

With most of the world's currencies driven by their central value against the dollar, the Kenyan shilling's slide against the dollar has seen it lose ground against every currency that is holding its dollar value, including that of its biggest export market, Uganda.

The Ugandan shilling, supported by buoyant dollar-denominated aid flows, is suddenly looking a lot more valuable compared with the Kenyan currency.

While a Kenyan shilling in April would buy 27 Ugandan shillings, today it buys just 23, a tumble of some 15 per cent.

The cause, say traders, is the Kenyan shillings retreat against the dollar, while the Ugandan shilling has held its dollar ground: thus the two now buy different amounts in the world, even though Kenya's exports to Uganda have been robust, after the first quarter setback.

For Kenyan exporters, the depreciation against the Ugandan shilling comes at a hard moment. Kenya supplies many of Uganda's manufactured goods and particularly those made from oil. This means that Kenyan producers are being hit in the marketplace from two sides. Just as they are being squeezed on one side by rising oil prices, they have to take a beating of lower revenues in their biggest export market.

This latest impact of the decline in foreign exchange earnings highlights the potential scale of secondary impact from the knock-out of an important export earner such as tourism, even as the industry gears itself back up, with bookings returning and money moving once again.

Yesterday, the Kenya Shilling weakened against the greenback to exchange at 69.09, a level that was last seen in February 2008 at the height of political turmoil that rocked the country in the wake of a disputed outcome of December's presidential poll.

"There is now real demand for the greenback as opposed to speculative positions that people took at the beginning of the year," says Brian Muigai, a senior dealer at NIC Bank.

On the dollar front, currency dealers say that a huge demand of the greenback against tight supply has been the driving factor behind the weakening of the Kenyan shilling.

Most of the demand is coming from the telecommunications and energy sectors as well as the large number of non-governmental and humanitarian organizations based in the country.

Dealers say that while dollar supply - mainly from horticulture, tourism, tea and coffee - has remained constant, demand for the greenback has been rising steadily.

Remittances from Kenyans living in the diaspora have however picked up in the past few months, mitigating the full impact of declining dollar inflows from traditional sources such coffee and tea.

Dollar inflows from the diaspora stood at $329 million for the first half of this year compared to $257 million in the first six months of 2007.

Pairs of non-US dollar currencies such as the Kenya and Ugandan Shilling are called "crosses." One foreign currency is traded for another without having to first exchange the currencies into American dollars.

Ordinarily, an individual who wished to exchange a sum of money into a different currency would be required to convert it into US dollars, and then reconvert into the desired currency. Cross currencies help traders bypass this step.

But for non-US dollar currencies that lack crosses, a conversion to US dollars is required to work out the exchange rate.

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