Strong shilling, not low production costs, making Uganda items cheaper

The debate on why eggs and milk imported from Uganda are cheaper than local products has been going on for some time.

Many Kenyans have attributed the disparity to the high cost of production in Kenya. However, this is not the case.

The main reason is the exchange rate or strength of the shilling against the Uganda currency, which leaves the Ugandan farmer with high purchasing power, or more Uganda shillings, after conversion.

To bring this into perspective, products grown in Uganda are transported by road more than 500 kilometres to markets in Nairobi and are still cheaper compared to the locally produced eggs or milk delivered to the same market.

Even if Kenyan farmers were inefficient producers, pineapples produced by multinational Del Monte, for instance, which enjoys economies of scale and efficient production mechanisms, are still expensive compared to the fruits ferried from Uganda.

There's no way Uganda could be so efficient in production to warrant such a disparity.

The strong local currency gives rise to a scenario where a farmer in Uganda who opts to sell in Kenya shilling finds himself in a more advantageous position, or with more purchasing power after conversion.

On a recent trip I made to Githunguri in Kiambu County, I met Ugandans working on dairy farms. I wondered, how come the workers leave their homeland, thousands of kilometres to come and work for Sh9,000 per month and still find it lucrative, yet a Kenyan in the same locality finds the salary unattractive.

Same answer: the Kenyan shilling is stronger. The Ugandans are at an advantage after converting the money into their local currency.

In the tourism sector, the so-called cheap holiday destinations are a result of varying exchange rates between countries and have nothing to do with costs. A good example is a comparison between South Sudan's capital Juba and Nairobi.

A South Sudanese can party from Friday to Sunday for $200 (Sh25,000) in Nairobi while in Juba, you need double or triple that amount, thus making Nairobi a cheaper holiday destination.

With Kenya's removal of exchange rate control in 1991, it might not be a walk in the park to fix the exchange rate. However, to deal with the cheap products from her peers, the invisible hand of the State has to come into play and devalue the shilling against regional currencies.

The writer is a financial analyst based in Nairobi, [email protected]