Uganda Shilling slides further as analyst proposes ‘third path’ strategy

KAMPALA — The Ugandan Shilling has weakened to a record low against the US dollar, raising concerns over the cost of fuel and other imported goods as policymakers move to contain pressure on the foreign exchange market.

Bank of Uganda exchange rate data published on Monday, October 26, show the central bank quoting the dollar at Shs4,429.76 for buying and Shs4,439.76 for selling.

The shilling also traded at Shs5,938.62 against the British Pound, Shs4,981.41 against the Euro and Shs34.23 against the Kenyan Shilling, reflecting its weakness against major international and regional currencies.

Market participants attribute the depreciation partly to increased demand for dollars from importers preparing for the end-of-year trading season, alongside rising costs associated with energy imports.

The weakening currency threatens to raise the cost of imported fuel, industrial inputs and consumer goods, adding to pressure on household budgets and businesses that depend on foreign supplies.

Fuel prices under pressure

Uganda relies on imported petroleum products, which are traded in dollars. A weaker shilling increases the local-currency cost of fuel imports, potentially pushing up pump prices, transport fares and the cost of distributing goods.

Higher fuel costs can also feed into the prices of food and other consumer goods as businesses pass on increased transport and production expenses.

The combined effect of currency depreciation and movements in international oil prices could complicate efforts to contain domestic inflation, particularly if the pressure persists.

BoU intervenes as Finance moves to curb spending

The Bank of Uganda has intervened in the foreign exchange market by selling dollars to ease pressure on the shilling, while monetary policy measures are intended to contain inflationary risks and support macroeconomic stability.

The Ministry of Finance, Planning and Economic Development has also signalled a tighter fiscal approach to complement the central bank’s interventions.

Permanent Secretary and Secretary to the Treasury Ramathan Ggoobi said the government had moved to curb discretionary spending and moderate aggregate demand as part of efforts to restore macroeconomic stability.

The measures come amid concerns that sustained currency depreciation could increase import costs, complicate inflation management and raise the cost of servicing dollar-denominated obligations.

Rwakakamba proposes ‘third path’ strategy

As policymakers weigh their options, policy analyst Morrison Rwakakamba has proposed what he calls a “Third Path” strategy, arguing that Uganda can ease pressure on the shilling without exhausting its foreign exchange reserves or allowing market volatility to go unchecked.

Writing from Heartland Farm in Rujumbura, Rwakakamba said policymakers should seek a middle ground between aggressive intervention to force down the dollar and inaction as the local currency weakens.

His proposal seeks to calm the foreign exchange market while the country awaits stronger inflows from seasonal remittances and anticipated oil revenues.

Among his recommendations is a limited and clearly capped sale of foreign exchange by the central bank. He proposes that the Bank of Uganda sell no more than $150 million in October and $250 million across November and December, while withdrawing an equivalent amount of shillings from circulation to limit the risk of expanding domestic liquidity.

He also proposes that the central bank publish weekly foreign exchange reserve figures every Friday, arguing that regular disclosure would help reassure the market about the country’s capacity to meet its external obligations.

Another proposal is to establish a targeted foreign exchange window of about $200 million a month for essential imports, including fuel, fertiliser, essential medicines and wheat.

Under the proposed arrangement, qualifying importers would access dollars at slightly more favourable exchange rates, while buyers of non-essential goods, including luxury vehicles and cosmetics, would obtain foreign exchange at prevailing market rates.

Rwakakamba further recommends temporary measures to discourage speculative hoarding of dollars, with the aim of directing foreign exchange towards productive trade rather than precautionary accumulation.

The proposals would require careful consideration of their implications for foreign exchange allocation, market pricing, reserve adequacy and access to dollars for businesses. Preferential exchange rates could also create distortions if eligibility criteria and allocation procedures were not transparent.

Outlook remains uncertain

The shilling’s near-term performance will partly depend on the balance between demand for foreign exchange to finance imports and inflows from coffee exports, tourism, remittances and other sources.

Stronger inflows could ease pressure on the local currency, while sustained demand for dollars could prolong the depreciation.

The effectiveness of the central bank’s interventions and the government’s fiscal measures will also depend on the duration of external pressures and the extent to which market participants regain confidence in the shilling.

Rwakakamba’s proposed “Third Path” therefore adds to the policy debate over how Uganda can manage exchange rate volatility while protecting foreign exchange reserves and limiting the impact of depreciation on households and businesses.