Uganda Shilling breaks Shs4,000 barrier as import costs rise

KAMPALA. Uganda’s shilling has breached the Shs4,000 mark against the US dollar for the first time in the central bank’s historical official exchange-rate series, signalling a sharp reversal for a currency that had been among the region’s stronger performers over the past two years.

The depreciation is being driven by strong demand for dollars from importers, manufacturers and energy companies, as well as seasonal corporate demand, according to market analysts and Bank of Uganda officials.

Bank of Uganda trading data on Monday, October 5, showed the dollar buying at Shs4,017.86 and selling at Shs4,027.86 at about 2:30pm, after the mid-rate had earlier stood at about Shs3,990.

The latest movement represents a significant shift from mid-August, when the shilling traded at about Shs3,740 to the dollar.

The currency has now moved beyond previous periods of severe pressure, including 2018, when the shilling weakened to about Shs3,897 to the dollar, and 2022, when the monthly average reached Shs3,832.38 in August and Shs3,825.59 in September.

The latest depreciation also marks a sharp reversal of gains recorded through much of 2024 and 2025.

Bank of Uganda data shows that the shilling strengthened from an average of Shs3,723.65 to the dollar in August 2024 to Shs3,586.57 in July 2025. The Ministry of Finance subsequently reported that the currency appreciated by 3.9 per cent between June and October 2025, reaching an average mid-rate of Shs3,463.9 in October.

That strength was supported by increased coffee export earnings, remittances, tourism receipts, foreign direct investment and foreign portfolio inflows into government securities.

Demand outpaces supply

Bank of Uganda Director of Research Adam Mugume has previously attributed the recent weakness to a combination of international and domestic pressures.

He said the strength of the dollar against major currencies, developments in the Middle East, higher oil prices and disruptions to global shipping routes had increased demand for foreign exchange.

Higher freight costs mean importers require more dollars to bring in the same volume of goods. Some businesses are also buying dollars in advance to protect themselves against further exchange-rate movements.

At home, Mr Mugume said demand from the manufacturing and energy sectors continues to outstrip the supply of foreign exchange from exporters and other sources.

Much of the demand is linked to raw materials, machinery and other capital goods, making it difficult for businesses to immediately reduce their dependence on foreign currency.

Analyst Stephen Kaboyo, the managing partner at Alpha Capital, said the shilling was under “immense pressure”, with seasonal demand adding to the strain.

He said some businesses were bringing forward their dollar purchases in anticipation of increased imports during the final quarter of the year.

“The current depreciation underscores the vulnerability of the shilling to seasonal forex demand and the anticipated corporate outflows,” Mr Kaboyo said.

He warned that pressure could persist as companies accumulate dollars ahead of the fourth-quarter trading season, while elevated energy prices could add to the depreciation.

Businesses, consumers feel heat

The weakening shilling is likely to increase costs for businesses that rely on imported fuel, raw materials, machinery and finished products.

For an importer, a dollar that costs Shs4,000 means more shillings are required to settle the same foreign-currency invoice than when the dollar traded at Shs3,500 or Shs3,600.

The higher costs can eventually be passed on to consumers through increased prices for fuel, transport, manufactured goods, electronics, medicines and other imported products.

Energy is particularly sensitive because petroleum products and many inputs used by the sector are priced in dollars.

A weaker shilling combined with higher international energy prices could therefore create additional pressure on transport and production costs and, ultimately, inflation.

Companies and government agencies with dollar-denominated obligations will also require more shillings to service the same amount of foreign debt.

The development could therefore complicate efforts to maintain price stability if exchange-rate pressures persist.

BoU faces policy balancing act

Despite the sharp depreciation, Bank of Uganda has previously cautioned against attempting to defend a particular exchange-rate level where market movements reflect underlying economic conditions.

Mr Mugume has said the central bank has “sufficient instruments to contain the exchange rate volatility”, but warned that “it would be policy inconsistency to lean against the wind in terms of trying to stop the depreciation”.

The challenge for the central bank is therefore to distinguish between temporary volatility caused by seasonal or speculative demand and depreciation driven by deeper changes in the supply and demand for foreign exchange.

The Shs4,000 threshold is significant not only as a psychological level but also because it highlights how quickly the exchange-rate gains of the past two years can be reversed when dollar demand rises.

For households and businesses, the immediate concern will be whether the current pressure remains temporary or develops into a prolonged period of currency weakness that feeds into import costs, inflation and the wider cost of doing business.