Oil delay leaves Uganda with $4b foreign exchange gap

KAMPALA. Uganda’s delayed start of commercial oil production has dealt another blow to the country’s efforts to rebuild foreign-exchange reserves, with the Bank of Uganda warning that billions of dollars previously expected from oil exports will not materialise in the current financial year.

The delay means the government will miss an anticipated source of foreign-exchange earnings at a time when the country is grappling with a widening current-account deficit, weakening dollar inflows and pressure on the Ugandan shilling.

The government had projected that oil exports would contribute more than $4 billion to the country’s external financing position in the 2026/27 financial year. However, with commercial production now unlikely to begin before the next financial year, the expected earnings have effectively been removed from the Bank of Uganda’s projections.

Bank of Uganda Governor Michael Atingi-Ego said the Central Bank had factored the anticipated oil exports into its external-sector projections, expecting the first shipments to provide additional foreign exchange and support the balance of payments.

But the latest production timeline means the country will have to contend with the resulting financing gap for longer than anticipated.

“Recall earlier on we had been told that we were expecting the first oil production in 2026/27. Now certainly we had factored that we were going to get some money into our balance of payments through exports of oil. Now the latest we have is that the earliest this oil is going to come is, some are saying June. I don’t know when, but it’s not this financial year. This is what I understand,” Mr Atingi-Ego said.

He was addressing journalists after the November Monetary Policy Committee meeting.

“It means that all that we were expecting from oil is going to be zero and therefore creating a gap in the balance of payments. Now, how do we balance that gap? Something has got to adjust, and that’s why we’re having all these pressures at the moment,” he added.

The implications extend beyond delayed oil revenues. The absence of the anticipated dollar inflows complicates the Bank’s efforts to accumulate foreign-exchange reserves, which are essential for financing imports, meeting external obligations and cushioning the economy against external shocks.

Mr Atingi-Ego said the outlook for reserve accumulation in the current financial year was considerably weaker than that of the previous year, when Uganda accumulated about $2.4 billion in reserves.

The development comes against the backdrop of a deteriorating external position, characterised by reduced foreign-exchange inflows and a widening current-account deficit.

The shilling, which had weakened from about Shs3,700 to approximately Shs4,100 against the US dollar, reflected the imbalance between the supply of foreign exchange and demand for dollars.

Mr Atingi-Ego attributed the depreciation largely to declining dollar inflows while demand for foreign exchange remained relatively strong.

“Because of the weakened external environment, the inflows reduced; the dollar inflows to Uganda reduced, but then the demand for these dollars did not reduce as much,” he said.

The Governor warned that although oil exports could eventually ease pressure on the current account, Uganda cannot rely on petroleum earnings alone to address its underlying external-sector weaknesses.

He pointed to agro-industrialisation, tourism and mineral development, which are among the pillars of the government’s Tenfold Growth Strategy, as important sources of future export earnings.

The country’s dependence on a relatively narrow range of export commodities also leaves it exposed to fluctuations in international prices.

Uncertainty surrounding coffee and gold prices could further complicate the outlook, given the importance of the two commodities to Uganda’s foreign-exchange earnings.

Shilling’s recovery

Despite the underlying weakness in the external sector, the shilling has recently experienced appreciation pressures, supported partly by foreign investors bringing dollars into the domestic market to purchase government securities.

Mr Atingi-Ego said the Bank’s recent monetary tightening had also helped moderate demand for foreign exchange by reducing the amount of Uganda shillings circulating in the financial system.

He disclosed that the government had raised Shs1.8 trillion through a recent Treasury securities auction, with non-resident investors accounting for approximately 12 to 13 percent of the amount.

The foreign investors brought dollars into the market to acquire government securities, increasing the supply of foreign exchange and providing some support to the shilling.

At the same time, tighter domestic liquidity has made shillings less readily available, moderating demand for dollars.

“The appreciation pressures we saw since then were attributed to two key factors. One, the improved supply of dollars in the market through the offshore players coming in for this auction. And then the other is the reduced demand because I talked about the shillings actually becoming scarcer,” Mr Atingi-Ego said.

However, he cautioned that the recent appreciation should not be mistaken for a lasting improvement in Uganda’s external position, noting that the exchange rate remained volatile and the effects of previous monetary policy decisions were still filtering through the economy.

On October 14, the Bank increased the Central Bank Rate (CBR) by 225 basis points to 12 percent in an effort to contain inflationary pressures and stabilise economic conditions.

The November Monetary Policy Committee maintained the rate at 12 percent but widened the operating bands around it from two to three percentage points on either side.

The Bank also set the rediscount and bank rates at four and five percentage points above the CBR, respectively.

Credit squeeze

The tighter monetary conditions could, however, increase the cost of borrowing and constrain businesses that depend on commercial bank financing for working capital and investment.

Professor Augustus Nuwagaba, who addressed questions on the monetary policy outlook, said the Bank was seeking to balance the need to contain inflation against the risk of undermining economic activity through excessively tight credit conditions.

He said private-sector credit was growing at approximately 20 percent as of September, while average lending rates stood at 17.4 percent during the quarter to September.

The credit growth rate was above the Bank’s preferred range of 12 to 13 percent, suggesting there was room to moderate lending without necessarily undermining the economy’s financing needs.

Prof Nuwagaba explained that tighter liquidity conditions would make Uganda shillings more expensive and force commercial banks to rely more on their own liquidity rather than borrowing from the Central Bank at a penalty.

“If a bank wants to borrow from Bank of Uganda, it will be at a penalty, so they have to use their own liquidity,” he said.

He added that the extent to which the measures would translate into higher lending rates and slower credit growth would depend on how commercial banks responded.

The Bank is also concerned about the inflation outlook, with core inflation projected to edge above six percent in the coming months, against its medium-term target of five percent.

Prof Nuwagaba warned that further increases in inflation could compel the Central Bank to tighten monetary policy again, even if doing so carried risks for economic growth.

“Supposing core inflation was to edge up further to seven and headline into double digits, does monetary policy stand and pray that it will come down by itself? Obviously, no. So, it would require another round of action of monetary policy,” he said.

The delayed oil production therefore presents Uganda with an additional external-sector challenge at a time when the country is already struggling with weaker foreign-exchange inflows, uncertainty over commodity export earnings and pressure on its currency.

While petroleum exports could eventually strengthen the country’s external position, the Bank of Uganda’s warning underscores the need to diversify export earnings and reduce the economy’s vulnerability to fluctuations in external financing.