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SAMUEL OBEDGIU: How strong dollar increases starvation in Africa

by UG STANDARD EDITOR | UG STANDARD EDITORIAL
20/10/2022
in OpED
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Samuel Obedgiu is an  Agricultural Scientist and Environmental Activist (PHOTO/Courtesy).
Samuel Obedgiu is an
Agricultural Scientist and Environmental Activist (PHOTO/Courtesy).

KAMPALA — At the height of the demise of the now defunct Bretton-woods monetary system, former U.S President Richard Nixon’s treasury secretary John Connally said, “The dollar is our currency but it’s your problem.”

The current strengthening of the dollar has indeed made this statement relevant again, manifesting itself through increased food prices.

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In just a space of 6 months, the U.S dollar has strengthened against many major currencies. But just as the dollar showcases how strong it can get, inflation is riding high and ravaging the continent. The Uganda Consumer Price Index (CPI) for September 2022 indicates that we have finally hit double-digit inflation.

In Kenya, the Association of manufacturers stated in June this year that importers in Kenya and the wider East Africa are struggling to import raw materials because they can’t access dollars at the official rate (sh. 116) to process imports. If you remember well, in Uganda, a bag of cement hit sh. 40,000 from sh. 25,000. Reason? Raw materials to process the cement had become expensive.

Many have attributed the rise in commodity prices to the raging Russia Ukraine war. I don’t buy this view entirely. We started feeling the impact of the price hikes as early as November 2021, way before that war. If anything, the Russia Ukraine war just worsened the pain but most certainly didn’t cause it.

Due to a strong dollar, the Electricity Regulatory Authority board tabled a proposal to allow it pass on the increasing production costs arising from exchange rate fluctuations, inflation and fuel prices to final consumers. The dollar rate is the biggest consideration when computing the electricity tariff in Uganda. Why? The investments in the electricity sector and operations are priced in dollars.

In 2010, a UN report called for abandoning the dollar as the main global reserve and trade currency. “The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” the U.N. World Economic and Social Survey 2010 said. This report was released at the height of the 2008 global financial crisis when the U.S central bank was undertaking its unconventional economic quantitative easing policy.

Simply put, Quantitative Easing increases money supply out of thin air to solve a challenge. You should also remember that during Quantitative Easing (QE2) in 2010, global food prices went up 60% and this created a humanitarian disaster for the 2 billion people who live on less than 2 dollars a day due to dollar strengthening (source “Dollar crisis” Richard Duncan former IMF & World Bank consultant). With a benefit of hindsight, it shouldn’t surprise anyone that the primary cause of the Arab spring in 2011, was the rise in wheat prices that created political instability in North Africa.

The reason a strong dollar can create havoc in Uganda is 80% of global trade is denominated in dollars. Dollar strengthening against the shilling is problematic because Uganda is a net importer of key goods. When global commodities are priced in dollars and those dollars become more expensive to importers than they used to be, it will take more shillings to buy the same quantity of goods leading to exported inflation.

In times of uncertainty, people see the dollar as a safe haven, because many people demand for it, which increases its value. This, in turn, makes the value of African dollar debt increase. The money that governments would have spent on food production increasingly goes to debt servicing.

The long term solution to this crisis is that the IMF special drawing rights should be given a greater role in global finance as a neutral reserve and trade currency. It’s hard for the American Central Bank to balance its internal policy needs with those of the global economy. No wonder, a recent UN report called upon the U.S central bank to stop increasing interest rates.

Way back in 1944, during the Bretton woods conferences, the economist john M. Keynes advocated for “a bancor” as a neutral reserve currency. But the Americans rejected this idea. The sick global monetary system needs to be reformed.

This writer,  Samuel Obedgiu is an
Agricultural Scientist and Environmental Activist

 

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