The Uganda shilling’s recent depreciation has turned what was once an abstract macroeconomic issue into a daily concern for households, traders, manufacturers and borrowers. When the shilling weakens, imported goods, machinery and fuel become more expensive. Businesses face higher operating costs, while households feel the pressure at markets and fuel stations.
The Bank of Uganda (BoU) therefore faces a delicate balancing act: calming the foreign exchange market and containing inflation without choking credit, investment and economic growth.
This article argues that the BoU’s strategy is necessary but incomplete. Monetary tightening and liquidity management can help curb speculative pressure and slow imported inflation. However, lasting shilling stability will depend more on increasing foreign exchange inflows, boosting export earnings, reducing unnecessary import dependence and maintaining credible communication than on defending the currency through high interest rates alone.
Why the Shilling Is Under Pressure
The current pressure on the shilling cannot be attributed to a single factor. It reflects a combination of global and domestic forces, including a strong US dollar, higher international oil and shipping costs, increased corporate demand for foreign currency, fluctuations in tourism receipts and weaker prices for some agricultural exports.
The shilling reportedly weakened from approximately Shs 3,604 per US dollar in March 2026 to about Shs 4,500 in late October 2026.
A major driver of this pressure has been demand from Uganda’s energy sector. Net foreign exchange demand from the sector reportedly rose from $360 million over the three months to September 2025, largely due to imports associated with oil development ahead of production. This is not simply a case of consumers rushing to buy dollars. It reflects a structural increase in foreign currency demand from major projects requiring imported equipment, specialised services and other essential inputs.
At the same time, speculation can amplify an existing shortage. When businesses and individuals expect the shilling to depreciate further, they may purchase and hold dollars earlier than necessary. This increases demand in the short term, intensifies scarcity and can make depreciation self-reinforcing.
The central bank has consequently warned against speculative behaviour, while the government has also taken steps to limit non-essential spending and ease pressure on domestic demand.
What the Bank of Uganda Has Done
To contain the pressure, the BoU raised its Central Bank Rate (CBR) from 9.75% to 12% on October 14, 2026. It also increased the cash reserve requirement for commercial banks from 11% to 13.5%.
These measures are intended to absorb excess liquidity, discourage speculative demand for foreign currency and prevent shilling depreciation from translating into persistent inflation.
The BoU maintains that Uganda operates a market-determined exchange rate. It does not seek to defend a fixed shilling-to-dollar rate but may intervene to smooth excessive volatility in the foreign exchange market.
The strategy matters because tighter monetary policy can help restore confidence and contain inflationary expectations. By making borrowing more expensive and limiting liquidity in the banking system, the central bank seeks to reduce excessive demand for shillings that could ultimately translate into increased demand for scarce foreign currency.
This is particularly important when expectations of further depreciation begin influencing business decisions. Companies may increase prices in anticipation of higher replacement costs, while consumers and investors may rush to acquire dollars. Such behaviour can turn temporary currency pressure into a more persistent inflation problem.
However, the policy comes with significant risks. Higher interest rates can slow economic activity, as businesses postpone investments, borrowers face more expensive loans and small enterprises struggle to access affordable credit.
For manufacturers, traders and entrepreneurs who rely on financing to expand operations, the cost of credit can determine whether they invest, maintain existing operations or scale back.
In essence, the BoU is trying to protect purchasing power without choking economic growth. Achieving this balance is one of the most difficult challenges in monetary policy.
What Monetary Policy Cannot Fix
Interest rate increases cannot, on their own, generate additional export earnings or reduce Uganda’s dependence on imports. If major infrastructure and energy projects require dollars to purchase equipment and specialised services, tighter monetary policy may curb speculative activity but cannot eliminate the underlying demand.
This is where a broader economic strategy becomes essential.
First, Uganda must increase export earnings by promoting value addition. Rather than relying heavily on the export of raw agricultural commodities, the country should expand agro-processing and develop industries capable of producing higher-value goods for regional and international markets.
Second, the government should strengthen local manufacturing and pursue practical import substitution. Supporting competitive domestic industries can reduce reliance on imported consumer goods and intermediate products while creating jobs and expanding the productive base of the economy.
Third, Uganda must attract productive foreign investment that generates exports, employment, technology transfer and sustained foreign exchange inflows. Investment that expands the country’s productive capacity can contribute more to long-term currency stability than short-term financial flows alone.
Fourth, tourism should be strengthened as a major source of foreign exchange. Uganda’s natural attractions, wildlife, cultural heritage and hospitality industry offer opportunities to attract more international visitors and increase tourism receipts.
Finally, regional trade should be expanded by addressing barriers to cross-border commerce, improving transport infrastructure and strengthening access to markets within the East African Community and the wider African Continental Free Trade Area.
These interventions will not deliver immediate relief to the shilling, but they can gradually address the structural weaknesses that make the economy vulnerable to foreign exchange shortages.
Striking the Right Balance
The BoU’s response is justified because inaction could expose Uganda to higher inflation, further currency instability and a loss of confidence. Nevertheless, monetary tightening should be accompanied by measures that strengthen the economy’s capacity to earn and retain foreign exchange.
Policymakers must also communicate clearly about the causes of exchange rate movements, the objectives of monetary policy and the conditions under which the central bank intervenes. Predictable communication can help reduce uncertainty and discourage panic-driven decisions by businesses and individuals.
Equally important is coordination between monetary policy and the government’s fiscal, industrial and trade policies. While the central bank works to contain inflation and stabilise the foreign exchange market, government should pursue reforms that expand production, improve export competitiveness and attract sustainable investment.
Ultimately, monetary policy is a short-term shield, not a complete solution to Uganda’s foreign exchange challenges. Lasting shilling stability will depend on stronger exports, increased domestic production, productive investment and sustained confidence in the economy.
The objective should not be to defend the shilling at any cost, but to stabilise it in a manner that protects purchasing power, preserves jobs, maintains access to credit and supports long-term economic growth.
The author works with the Afro-Arab Youth Council (AAYC).
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