The Ugandan Shilling is facing renewed pressure, with the Bank of Uganda’s indicative exchange rate reaching Shs3,919 to the US dollar on Tuesday, a loss of Shs315 since March. Commercial banks are quoting the dollar as high as Shs4,040. This depreciation, though not yet leading to direct intervention from the central bank, is increasing the cost of imported goods and services, raising concerns for businesses reliant on foreign currency. The Bank of Uganda Governor, Michael Atingi-Ego, stated that intervention would only occur if movements became disorderly, which he believes has not been the case so far as the depreciation has been smooth and not erratic.
The weakening of the Shilling is primarily driven by a mismatch between the demand for dollars and available foreign currency inflows. Key factors contributing to this include Uganda’s heavy reliance on imported fuel, where higher international oil prices necessitate more dollars for the same volume of petroleum products. Additionally, some traditional sources of foreign exchange, such as NGO inflows and certain export revenues, are not generating the same volumes as previously. Meanwhile, the shilling has already slumped to a 25-year low, reaching 3,870/3,880 on Friday morning, due to strong demand from corporates, importers, interbank, and offshore players that has outpaced available dollar inflows.
Despite the immediate pressure, Uganda's foreign exchange reserves remain relatively strong, standing at $6.62 billion in July, providing a buffer against external shocks. This figure is significantly higher than the $3.6 billion recorded a year earlier and covers approximately four months of imports, according to the Bank of Uganda. The central bank is also diversifying its reserve assets through a domestic gold-buying program. Future stabilization is anticipated with commercial oil production and increased foreign exchange inflows from tourism and events like the Africa Cup of Nations, which Uganda will co-host. However, in the near term, the Shilling remains vulnerable to the strength of the US dollar, global oil prices, and the performance of Uganda’s foreign-exchange earning sectors.
Analysts note that the shilling has depreciated by about 5.8% since the beginning of the year. The depreciation has also been influenced by bearish market sentiment due to renewed hostilities in the US-Iran conflict, increased demand from oil, manufacturing, and telecommunications companies, and capital movements by offshore investors ahead of general elections. Global investors shifting funds into safe-haven assets and rising energy prices have further intensified the pressure. While inflows from remittances, coffee, and gold exports provide some support, they have been insufficient to completely cushion the shilling against the strong demand for hard currency.
