Shilling has weathered a stormy 2024

The shilling started a noticeable appreciation trend in February and has held on to the trend to date.

Data from Bank of Uganda indicates that the unit has strengthened by 7 percent, from Shs3,932.22 per dollar at the close of February to Shs3,658.3 as of December 13. 

The positive performance is primarily due to Bank of Uganda’s tight monetary policy stance, reforms undertaken in the domestic market, increased inflows into extractive industries, and improved inflows from commodity exports, especially gold, coffee cocoa, offshore investors, and remittances.

“Over the past year, the shilling has remained notably stable, with its exchange rate staying largely within two standard deviations. The shilling’s value has not shown any significant deviation or extreme volatility, reflecting a period of relative exchange rate stability in the face of global and domestic economic challenges,” Adam Mugume, the Bank of Uganda research executive director, says.

Over the past decade, he says, the shilling has demonstrated remarkable stability, depreciating by only 32.9 percent against the dollar, the lowest level of depreciation among selected African currencies, particularly within East Africa.

“The performance stands out as approximately 10 percent better than the second and third-ranked countries with floating exchange rate regimes on the African continent. Such performance underscores Uganda’s resilience to both domestic and external shocks, bolstered by effective monetary and exchange rate policies,” Mugume says. 
The low depreciation, he argues, therefore, signals enhanced investor confidence in the Ugandan economy and its ability to manage external pressures such as fluctuations in commodity prices, shifts in global monetary policy, and geopolitical uncertainties.

Other currencies in East Africa such as the Kenyan and Tanzanian shillings have experienced significant volatility due to structural imbalances and external shocks.

However, the shilling has maintained a more predictable trajectory, and Mugume says this will continue into 2025 - despite elevated global uncertainty - due to strong foreign direct investments in extractives, and robust economic growth. 

This, he says, will favour inflows of remittance, which are key in buttressing the shilling’s strength.

Uganda’s remittances largely come from the Middle East, Europe, Africa, and the Americas.

Floating foreign exchange regime 

Uganda operates a floating exchange rate regime and, therefore, currency movement is a reflection of supply and demand for the hard currency.

Additionally, at least 80 percent of Uganda’s private sector imports are goods for production (capital and raw materials), which suggests that an appreciation of the shilling favours production.

A strong shilling also supports export competitiveness, especially agricultural products that don’t rely on imported inputs, and contributes to low imported inflation that could sip through consumptive imports.

Mugume also says that whereas there are claims of illegal dollar inflows, Bank of Uganda data indicates that dollars that come into Uganda come in exchange for something - either goods or services.

“There can’t be illegal dollar inflows from any country,” he says.

Opening on a weak trend  

Rahmah Masagazi, the Absa head of sales - global markets, says the shilling has remained resilient in 2024, having opened the year at Shs3,775. 

Throughout the first 2024 quarter, he says, the shilling lost ground, ending January at Shs3,818, before weakening further to Shs3,876 mid-February, which he attributes to corporate demand and lingering fiscal concerns following government’s indication that it would rely heavily on commercial debt after the World Bank halted new funding.

“This prompted sell-offs in domestic bonds creating dollar demand. Further, we saw the shilling hit an all-time low of Shs3,950 just before the end of February on the back of offshore investor demand as they exited the Uganda market for more lucrative markets in the region, specifically Kenya which issued an attractive infrastructure bond in that period,” he says, noting that the unit recovered after Bank of Uganda intervened by raising the Central Bank Rate from 9.5 percent to 10.25 percent, which limited liquidity and eased pressure on the shilling.

The action, therefore, saw the shilling recover to Shs3,807, and remained resilient, mainly buoyed by good coffee receipts that ensured dollar inflows and have seen the currency pair remain range bound at between Shs3,670 and Shs3,750, amid subdued corporate demand of dollars. 

Masagazi, however, says the shilling lost ground in November trading at above Shs3,700 on the back of US elections in what market participants widely referred to as a ‘Trump trade’ with some market players across the globe anticipating the dollar to strength on the back of some of his policies and spurring dollar demand.

However, he says the shilling recovered shortly and has been trading at between Shs3,640 and Shs3,680, supported by inward remittances and continued commodity inflows between last half of November and first half of December, appreciating by about 3.5 percent since”.

From the policy point of view, Ramathan Ggoobi, the Finance Ministry permanent secretary and secretary to the Treasury, says the shilling has on average strengthened, compared to the same period last year.

“The shilling has remained stable against the dollar despite depreciation pressures at the beginning of 2024,” he says, noting this has been due to prudent and pro-active monetary policy, higher inflows from non-governmental organisations, increased inflows from remittances and offshore investors. 

Monetary policy movements

The International Monetary Fund says in its World Economic Outlook 2024 that following an initial period of easing, monetary policy has tightened significantly, with central banks in many emerging markets starting earlier than major central banks in advanced economies.

“The change in global monetary conditions is easing the pressure on emerging market economies, with their currencies strengthening against the dollar and financial conditions improving. This will help reduce imported inflation pressures, allowing countries to pursue their own disinflation path more easily,” says Prof Pierre-Olivier Gourinchas, the IMF economic counsellor. 

On the other hand, Tobias Adrian, the IMF financial counsellor and director of monetary and capital markets, says reforms implemented since the global economic crisis have helped to support international financial stability, but “strengthened supervision and regulation, better crisis management preparedness and resolution processes, enhanced data collection, and a macro-prudential approach to financial sector oversight, have raised the financial sector’s resilience to a multitude of shocks experienced in recent years. 

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