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“AFRICA | CURRENCY MARKETS

Uganda Shilling Hits Record Low as Surging Dollar Demand Puts Pressure on Economy” 🚨🚨🚨

KAMPALA — Uganda’s shilling has fallen to its weakest level on record against the U.S. dollar, as persistent demand for foreign currency from importers and energy companies collides with a more challenging global environment.

The currency traded as weak as 3,965 to 3,975 shillings per dollar, surpassing its previous levels and marking a historic low. A week earlier, the shilling was trading around 3,925 to 3,935 per dollar.

The latest decline highlights the growing pressure facing Uganda’s foreign-exchange market. Traders say companies are rushing to secure dollars ahead of the peak import season, while energy importers are demanding additional foreign currency as global fuel markets remain volatile.

For Uganda, the weakening currency is more than a financial-market story. A sustained decline in the shilling can raise the local-currency cost of imported fuel, machinery, raw materials, medicine and other goods, potentially feeding into inflation and household expenses.

Importers Drive Demand for Dollars

One of the biggest forces behind the shilling’s decline is strong demand for U.S. dollars from businesses that need to pay overseas suppliers.

Energy companies are particularly important because Uganda relies on imported petroleum products. When international fuel prices rise, importers need more dollars to purchase the same quantity of fuel.

Manufacturers are also competing for foreign currency to purchase machinery, intermediate goods and raw materials.

Uganda’s Finance Ministry reported that the shilling had already weakened by 0.7% in August, with the average exchange rate moving from about 3,704.51 per dollar in July to 3,730.25 in August. The ministry attributed the move largely to increased foreign-exchange demand from the energy and manufacturing sectors.

That pressure intensified through September.

Global Energy Turmoil Adds to the Pressure

The currency decline is occurring against the backdrop of significant instability in global energy markets.

The ongoing conflict involving Iran has contributed to uncertainty surrounding fuel supplies and international oil prices. That uncertainty is particularly important for countries such as Uganda that depend heavily on imported petroleum.

Higher oil prices effectively increase Uganda’s dollar requirements.

An importer paying for fuel in dollars must obtain more foreign currency when the international price of crude or refined petroleum rises. At the same time, a weaker shilling means those dollars become more expensive in local-currency terms.

That creates a potentially damaging cycle:

Higher oil prices → greater dollar demand → weaker shilling → more expensive imports → higher domestic costs.

Reuters reported that traders expect dollar demand from Uganda’s energy sector to remain elevated as uncertainty surrounding the Iran conflict continues.

Bank of Uganda Tightens Its Position

The Bank of Uganda has already taken steps to address liquidity conditions in the financial system.

The central bank recently increased the cash reserve requirement for commercial banks from 11% to 13.5%, with the new requirement taking effect in September.

The measure requires banks to hold a larger portion of eligible deposits as reserves at the central bank.

The move can reduce liquidity available within the banking system and is part of the central bank’s broader response to changing financial conditions.

However, the Bank of Uganda has indicated that it does not plan to directly defend the shilling through dollar sales.

That is significant.

Rather than attempting to establish a specific exchange-rate level by spending foreign-exchange reserves, policymakers appear prepared to allow market forces to play a greater role in determining the currency’s value.

The Currency Could Face More Weakness

Market participants are increasingly concerned that the shilling could weaken further.

Before reaching the latest record low, traders had already warned that the currency could approach the psychologically important 4,000-shilling-per-dollar level.

With the exchange rate now close to that threshold, continued demand from importers could put additional pressure on the currency.

Stephen Kaboyo, managing director of Kampala-based financial-services firm Alpha Capital Partners, said the shilling was being affected by people rushing to acquire dollars ahead of the peak import season.

If businesses continue building dollar positions, demand could remain elevated even if there is no dramatic deterioration in Uganda’s underlying economy.

What a Weaker Shilling Means for Consumers

The biggest concern for ordinary Ugandans is the possibility of imported inflation.

Uganda imports many of the products and inputs required by households and businesses. When the shilling loses value, importers must spend more local currency to purchase the same amount of goods priced in dollars.

Fuel is one of the most important examples.

A weaker shilling can make petroleum products more expensive even if global oil prices remain unchanged. When transportation costs increase, businesses may eventually pass those expenses on to customers.

The effects can spread through the economy.

Higher fuel costs can raise the price of transporting food from farms to cities. Manufacturers can face higher costs for imported machinery and raw materials. Retailers can pay more for imported merchandise.

Over time, some of those costs can reach consumers.

Uganda was already experiencing pressure from food and fuel prices. September headline inflation accelerated to 4.6% from 4.1% in August, while food-crop and related-items inflation more than doubled to 4.5% from 2.1%.

Fuel Prices Are Becoming a Bigger Problem

The combination of currency weakness and expensive energy is particularly concerning.

Uganda’s petrol price reached approximately 6,950 shillings per liter in late September, compared with around 5,090 shillings in March — an increase of roughly 36%.

Annual petrol inflation reached 30.9% in September, while diesel inflation climbed to 42.5%, according to Uganda Bureau of Statistics data cited by the Daily Monitor.

Those increases matter far beyond the pump.

Truckers, farmers, manufacturers and retailers all depend on fuel. When fuel becomes more expensive, the cost of moving goods through the economy rises.

That creates the possibility of broader inflationary pressure even when overall inflation remains below the central bank’s medium-term target.

Uganda’s Trade Position Matters

Uganda’s dependence on imported goods makes the exchange rate particularly important.

The country needs dollars to pay for petroleum, machinery, industrial inputs, pharmaceuticals and other imported products.

At the same time, Uganda receives foreign currency through exports, remittances, tourism and other inflows.

The exchange rate is influenced by the balance between those sources of dollars and domestic demand for them.

Uganda’s Finance Ministry reported that commodity exporters, nongovernmental organizations and remittances provided some foreign-exchange support in August, but those inflows were insufficient to offset demand from energy companies and manufacturers.

That imbalance has become increasingly visible in the currency market.

The Central Bank Faces a Difficult Balancing Act

The Bank of Uganda now faces a complicated policy environment.

Allowing the shilling to adjust naturally can protect foreign-exchange reserves and prevent the central bank from spending large amounts of dollars defending an exchange-rate target.

But excessive currency weakness can increase imported inflation and put additional pressure on households and businesses.

Raising interest rates could potentially make shilling assets more attractive, but higher borrowing costs could also slow investment and economic activity.

Meanwhile, tighter liquidity conditions can help contain some inflationary pressures but cannot directly solve shortages of dollars caused by import demand.

The central bank therefore has to balance currency stability, inflation and economic growth rather than focusing on any single indicator.

The Bigger Picture for Uganda

The shilling’s record low comes at a time when several economic pressures are converging.

Global oil prices remain volatile. Importers need more dollars. Food prices are increasing. Fuel costs are elevated. And international geopolitical tensions are creating additional uncertainty.

None of these factors alone necessarily signals a major economic crisis.

But together, they create a more difficult environment for policymakers.

The critical question is whether the shilling’s decline remains an orderly adjustment or develops into a sustained depreciation cycle.

If dollar supply improves through stronger exports, remittances or investment inflows, the pressure could ease.

If import demand remains elevated while global energy costs continue rising, however, the currency could remain under pressure.

What Investors and Businesses Are Watching

The next several weeks will be important for Uganda’s currency market.

Investors and companies will be watching:

• The shilling’s movement toward or through 4,000 per dollar

• Global crude-oil prices

• Dollar demand from fuel importers

• Manufacturing and merchandise-import demand

• Bank of Uganda liquidity measures

• Foreign-exchange reserves

• Food and fuel inflation

• Export and remittance inflows

  
  

The direction of the U.S. dollar globally will also matter. A stronger dollar can put additional pressure on emerging-market currencies, while a weakening dollar could provide some relief.

THE BOTTOM LINE

Uganda’s shilling has reached a historic low as demand for U.S. dollars continues to overwhelm available supply.

The immediate pressure is coming from importers, particularly energy companies and manufacturers, while geopolitical uncertainty and elevated fuel prices are making the situation more difficult.

The central bank has responded with tighter liquidity conditions but has indicated it does not intend to directly defend the currency by selling dollars.

For Uganda’s economy, the biggest risk is that continued currency weakness makes imported fuel, machinery, food and other necessities increasingly expensive.

The shilling falling to nearly 4,000 per dollar is therefore more than a currency-market milestone. It is a warning sign that rising dollar demand, energy costs and global uncertainty are beginning to put meaningful pressure on Uganda’s broader economy.