The Bank of Uganda (BoU) has increased the Cash Reserve Requirement (CRR) by 2.5 percentage points, raising it from 11% to 13.5% for commercial banks, effective September 24, 2026. This is the second such adjustment in less than five months, following an increase from 9.5% to 11% in May. The central bank's decision aims to tighten liquidity in the banking system and mitigate the increased volatility of the Ugandan shilling against the US dollar.
The shilling has weakened significantly in September, losing approximately 6% against the dollar since the beginning of the month and reaching a two-year low of 3,925 shillings per dollar. This depreciation is driven by a surge in demand for foreign exchange across key economic sectors like energy, manufacturing, and telecommunications. By increasing the CRR, the BoU intends to reduce the amount of local currency available in the financial system, thereby potentially curbing the demand for dollars in the foreign exchange market.
This move by the BoU is a monetary policy tool designed to promote monetary and financial stability. It is also a more cost-effective intervention compared to direct foreign exchange market interventions, given Uganda's relatively low foreign currency reserves, which stood at $6.62 billion in July, covering about four months of imports. The increase means that for every Shs100 of deposits, commercial banks must now hold Shs13.50 in reserves, reducing the funds available for lending and investment. While some banks with excess liquidity may absorb this comfortably, others may need to adjust their balance sheet activities, potentially leading to tighter credit conditions.
Analysts note that withdrawing excess shilling liquidity can strengthen monetary control, reduce pressure on the shilling, and help contain inflationary risks, particularly those stemming from imported inflation due to geopolitical events. The cumulative increase in the CRR from 9.5% to 13.5% between May and September demonstrates a sustained effort by the central bank to manage liquidity and stabilize the exchange rate without directly depleting foreign reserves.
