Riding the super-shilling roller-coaster

CURRENCY speculators should forget about the falling yen; do not worry if the pound slips half a cent against the dollar or celebrate the mark's quarter per cent rise against the franc. Watch the super currency: the Uganda shilling.

If you had bought Uganda treasury bonds half a year ago your profit would already be 40 per cent - 20 per cent interest and an astonishing 20 per cent rise against the dollar. The rise has been so dramatic that this week banks and foreign exchange dealers in Kampala stopped buying dollars.

The Uganda currency market, completely freed by the government last November, is in turmoil, with the Bank of Uganda uncertain about whether it should step in to soak up dollars and allow the shilling to rise. This is believed to be the first time that an African currency has appreciated since free-market policies were introduced in the mid-1980s.

Only a few years ago the Uganda shilling was barely worth the paper it was printed on. After Idi Amin was overthrown in 1979 and the shilling collapsed, in exchange for a dollar you got a wedge of bank notes as thick as a Jeffrey Archer novel. Bank clerks measured the piles of bank notes with a ruler or counted them out in bundles permanently bound in string or rubber bands. Few people bothered to count the notes if the bundle felt about right. Even the new currency issued in 1987 soon collapsed and you had to take a handcart or a couple of suitcases to the bank if you were thinking of making a substantial withdrawal.

Now that has all changed. The free-floating shilling has been stable for almost two years against the dollar, inlation has been -2 per cent since June last year and the price of food has fallen.

Since November the rate had been rising gently from 1,200 to the dollar to 900 this week, and it seemed set to rise further. So on Wednesday banks and dealers stopped buying dollars for fear of losing out as the shilling continued its rise.

The immediate reason seems to be the 20 per cent rise in the coffee price. Coffee remains Uganda's chief foreign-exchange earner and chaos in its neighbours, Zaire, Rwanda and Burundi, has resulted in much of their coffee entering the Ugandan market.

But the deeper reason is the government's commitment to monetarism. Although a sixth of Uganda's Gross Domestic Product still comes from aid, the fact that Western donors were prepared to commit dollars 500m (pounds 330m) of aid last year is itself a sign of confidence in Yoweri Museveni's free market polices.

Cutbacks in government spending and control of the money supply have been so fierce that even IMF officials are reported to have blanched. One said in Kampala yesterday that he would prefer to be quoted as saying he was 'impressed by the fervour' of President Museveni's government.

The rise of the shilling has put the government in a quandary. The Governor of the Bank of Uganda, Charles Kikonyogo, was quoted yesterday as saying 'the exchange-rate policy is that market forces should operate'. But another official said that the bank had been intervening to slow the shilling's appreciation and added: 'We cannot leave exporters and importers entirely at the mercy of the markets. The bank must make its presence felt.'

There is a serious down-side to the rise of the super-shilling. Uganda, now an island of tranquillity in an ocean of wars and chaos, is base to more than 100 aid agencies trying to feed refugees and the hungry in Sudan, Zaire, Rwanda, Burundi and Tanzania. Last year the World Food Programme spent dollars 21m buying Ugandan food for regional relief operations. Those supplies will dry up if the aid agencies cannot obtain Uganda shillings with their dollars and pounds.

A frustrated Trevor Page, the WFP director, said yesterday: 'It's just not possible to explain to a starving child in Burundi that it will have to wait several weeks for the Uganda currency market to settle down before it gets its next meal.'