Uganda Shilling nears Shs4,000 as dollar inflows shrink

KAMPALA: Uganda’s foreign-exchange reserves remain relatively strong, but the shilling is coming under renewed pressure as demand for dollars outpaces inflows from some of the country’s traditional sources of foreign currency.

The Bank of Uganda’s indicative exchange rate reached Shs3,919 to the US dollar on Tuesday, up from about Shs3,604 in March, representing a loss of Shs315 over the period.

Commercial banks were quoting the dollar at as much as Shs4,040, increasing the cost of imported goods and services and raising concerns among businesses that rely heavily on foreign currency.

The weakening has, however, not yet prompted the central bank to intervene directly in the foreign-exchange market.

Bank of Uganda Governor Michael Atingi-Ego said the central bank does not seek to defend a particular shilling-dollar rate, but intervenes when movements become disorderly.

“Intervention is based on smoothing out excessive volatility in the shilling exchange movements,” Mr Atingi-Ego said.

Asked whether the latest depreciation warranted intervention, he said: “Not to the best of my knowledge. If it has depreciated, it has depreciated in a smooth way; it’s not been erratic, it’s not been very volatile. So, I think it has not warranted my intervention.”

The position means the central bank is prepared to allow the shilling to adjust to market forces as long as the movement remains orderly.

Import pressure

One of the immediate pressures is Uganda’s dependence on imported fuel.

Higher international oil prices mean importers require more dollars to pay for the same volume of petroleum products, increasing demand for foreign currency.

Mr Tony Otoa, the Uganda National Oil Company (UNOC) chief corporate affairs officer, said rising oil prices and disruptions to shipping routes were increasing risks for oil-importing economies.

“Oil prices are shooting upwards. Shipping routes are getting more constrained. The Middle East conflict is escalating at the worst time possible for the global economy,” Mr Otoa said.

He said the longer routes and rising insurance costs were likely to put additional pressure on fuel supply and prices in Africa.

“What we need is a de-escalation of the conflict,” he said.

For Uganda, higher fuel costs can feed into the wider economy through transport, electricity generation and the cost of imported goods.

Inflows under pressure

At the same time, some sources of foreign exchange are not generating the same volumes of dollars they previously did.

Tourism, which is one of Uganda’s major sources of foreign exchange, earned about $1.7 billion in the previous year, up from $1.28 billion, while international visitor arrivals reached 1.64 million.

However, disruptions linked to the Ebola outbreak and travel advisories have affected the sector, with some operators reporting cancellations and disruptions to travel.

The NGO sector has also experienced a reduction in donor funding, cutting another source of foreign-currency inflows.

NGO Bureau Secretary Stephen Okello has said the number of NGOs in the country has declined from about 14,000 in 2019 to roughly 5,000 active organisations.

Sarah Bireete, the Centre for Constitutional Governance executive director, said reduced NGO financing had removed an important source of foreign currency.

“The dollar exchange rate in Uganda is soon hitting 4,000 shillings because the dirty politics closed the tried and tested avenues of NGO inflows that have always helped Uganda’s currency stay strong and stable,” Ms Bireete said.

Mr Henry Bazira of the Water Governance Institute similarly argued that donor-funded organisations contribute to the economy by bringing in foreign currency.

“The trouble is that guys in government thought NGOs were doing nothing for the economy, yet they were bringing in much-needed FDI. NGOs in effect are serious investors in the economy and should be treated as such,” Mr Bazira said in a post on X.

Reserves provide cushion

Despite the pressure on the shilling, Uganda does not currently face an immediate foreign-exchange crisis.

The country’s foreign-exchange reserves stood at $6.62 billion in July, slightly below the $6.68 billion recorded at the end of June but significantly above the $3.6 billion recorded a year earlier.

The reserves provide a buffer against external shocks and can finance several months of imports.

The International Monetary Fund estimates that the reserves cover about 3.1 months of imports, while the Bank of Uganda puts the import cover at about four months.

The central bank has also been diversifying its reserve assets through its domestic gold-buying programme, under which it purchases locally produced gold.

The strategy is intended to strengthen the country’s reserve position and provide an additional buffer against external shocks.

Oil exports offer hope

The central bank expects some of the pressure to ease as new sources of foreign exchange emerge.

Mr Atingi-Ego has said the shilling could stabilise in the near term as Uganda moves closer to commercial oil production and begins receiving foreign-exchange inflows associated with oil exports.

The country is also expected to receive increased foreign-exchange inflows from tourism and other economic activity, including the Africa Cup of Nations, which Uganda is due to co-host next year.

For now, however, the shilling remains exposed to the strength of the US dollar, global oil prices and the performance of Uganda’s foreign-exchange earning sectors.

The latest depreciation therefore presents a more complicated picture than a simple shortage of dollars: Uganda has a substantial reserve cushion, but the flow of new dollars into the economy and the demand for them remain uneven.

For businesses, the immediate concern is the cost of imported inputs, fuel and foreign-currency obligations. For the central bank, the challenge is to allow the exchange rate to adjust without letting the movement become disruptive to the wider economy.