By Prof Augustus Nuwagaba (PhD), Deputy Governor Bank of Uganda
There has been a lot of debate in regard to what makes a currency potent.
Is it the exchange rate against the United States Dollar (USD)?; the size of the notes in your wallet?; or something else? The truth is; a strong currency starts with a strong and productive economy.
Take the Ugandan shilling for example. You feel its strength in very simple things: what Shs10,000 can buy today compared to what it bought a year ago. If prices keep surging, your money buys less of a given commodity or service. That is a sign of eroded purchasing power.
On the other hand,when prices remain stable, a farmer can budget for inputs, an entreprenuer can invest and a family can plan school fees and other expenses.
Then, there is production. A country that produces things people crave to buy say; minerals, manufactured goods, tourism and other services, earns foreign exchange (USD, British Pounds etc). The more we produce and sell to the rest of the world, the more weight our currency gets.
Look at coffee; When Uganda exports coffee, buyers abroad pay for it in foreign currency. That money comes into Uganda and supports our ability to pay for imports and other international obligations. So, when we talk about a strong shilling, we should also talk about what Uganda produces and sells abroad.
For instance, if we constantly buy more from the rest of the world than we sell, we need more dollars and other foreign currencies to settle the import invoices. This implies pressure on the shilling; why? Because we experience what we call a net outflow of foreign echange.The corollary is that if we export more in value (more export receipts) than import invoice value, then the shilling appreciates (gains more weight/value).
Therefore, foreign exchange reserves are a major important buffer. They give the country some room to deal with shocks, whether it is a rise in import costs, weaker export earnings or global economic turbulence.
And no, simply printing more money does not make a country richer. If the amount of money grows much faster than the goods and services being produced, prices will rise. Real wealth comes from producing more and ensuring more productivity.
So, what makes a currency strong are; stable prices, more production, strong export sector performance, investment and healthy reserves. The sacrosanct factor is ofcourse investor confidence in the economy.
The author is the Deputy Governor Bank of Uganda
