Ugandan businesses importing goods face a difficult trade-off as the weakening shilling pushes up their costs, according to the Bank of Uganda. Dr Adam Mugume, the central bank's Executive Director of Research, said some firms may need to reduce their profit margins to keep products affordable and hold onto customers. The rising cost of foreign currency has increased importers' liabilities, squeezed their profits and disrupted their plans for expansion.
When import costs rise, businesses typically face two options: raise prices to protect profit margins, or absorb some of the increase to keep products affordable. Raising prices risks losing price-sensitive customers, while accepting lower margins means earning less on each sale. However, lower prices could help a business retain customers, attract new ones and gain market share, potentially increasing overall sales volume enough to offset the smaller profit per item.
An illustrative scenario shows the maths involved. A trader earning 10,000 shillings gross profit per item while selling 100 items weekly generates 1 million shillings before operating expenses. If the gross profit per item falls to 8,000 shillings, the trader must sell 125 items to generate the same total profit, requiring a 25 per cent increase in sales volume just to match the previous return.
The decision ultimately depends on whether a business can absorb part of the cost increase without damaging its financial health, and whether lower prices will generate enough additional demand to justify accepting a smaller margin. Some businesses may have no choice but to raise prices, while others might find it more sustainable to share the burden with customers. Rising import costs complicate the challenge for both businesses trying to remain viable and policymakers trying to contain inflation.