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Stable shilling amid hurdles

Enock Nyorekwa Twinoburyo

What you need to know:

  • Uganda stands out for its consistent USD accessibility, facilitated by its liberalised, flexible exchange rate regime

Six years ago, when I started working in Kigali, Rwanda, the Ugandan Shilling (Shs) was trading at 3,750 to the US Dollar ($). At the time, I considered taking a longterm investment position in dollars, given the consistent depreciation of the Shilling against the dollar — an average of 9.5 percent annually between fiscal years 2010/2011 and 2015/2016. 

Some years saw sharper double depreciations (like 2015), leading banks to freeze foreign exchange lending. Remarkably, the Shilling has shown resilience, trading at levels not far from where it was six years ago. The shilling has only depreciated against the dollar by 1.2 percent annually between 2016/2017 and 2023/2024. Uganda stands out for its consistent USD accessibility, facilitated by its liberalised, flexible exchange rate regime and prudent macroeconomic management. 

The Bank of Uganda (BoU) has demonstrated strong policy consistency, maintaining an open capital account and a flexible exchange rate regime, which has helped bolster investor confidence and sustained foreign investments. This market-driven framework allows the Shilling to adjust naturally to economic conditions, ensuring external competitiveness and macroeconomic stability. In contrast, the Central Bank of Kenya (CBK) has implemented frequent policy shifts, including periodic exchange rate interventions, which have sometimes unsettled investor confidence. 

Similarly, the Bank of Tanzania (BoT) maintains a managed exchange rate policy, while the National Bank of Rwanda (NBR) intervenes actively in both domestic and cross-border forex markets to stabilise the RWF. Shilling stability is further founded in its Balance of Payments (BoP), which is a financial statement summarising all economic transactions between a country and the rest of the world over a specific period. Over the years, Uganda’s trade deficit has increased, reflecting higher imports compared to exports. Between FY2017/2018 and FY2023/2024, the trade deficit expanded from $2.08 billion to $3.12b. 

However, this gap is partially offset by growing and stable inflows such as Foreign Direct Investment (FDI) and remittances, which remain robust. For instance, remittances increased from USD 1.25 billion in FY2017/2018 to $1.29b in FY2023/2024, while FDI more than tripled, rising from $929m to $3.3b over the same period. 

These inflows have been bolstered by substantial oil sector investments, new gold discoveries, and strengthened financial sector regulations that require higher capital thresholds. Portfolio inflows have also risen, with increased investments by foreigners into government bonds and bills. 

By conducting surveys on dollar demand and supply from private investments, public debt service, dividend payouts, import demand, and personal transfers, BoU gains insights into currency flows, enabling strategic market interventions through timely sales and purchases.

 This proactive approach ensures stability and liquidity in the foreign exchange market. A key downside risk is that Uganda’s positive dollar inflows have not translated into a sustained build-up of foreign reserves. Although gross reserves temporarily increased with the IMF’s 2021 Special Drawing Rights allocation, they have since declined. A significant factor is the reduction in donor budget support, particularly due to conditions linked to Aid for Health Accountability (AHA), which is expected to remain subdued in the medium term. 

This persistent funding gap coincides with Uganda’s substantial foreign currency requirements for critical infrastructure projects, placing sustained pressure on reserves and hindering their growth. Looking ahead, fiscal and monetary policy coordination, import substitution, along with improved export diversification and promotion, will be essential. However, building strong oil revenue stabilisation buffers in the medium term and sufficient foreign exchange reserves will remain critical to sustaining shilling stability and resilience against external shocks.

Dr Nyorekwa Twinoburyo, is a senior economist and consultant with the Sustainable Development Goals Center for Africa, based in Kigali.