Uganda’s recent shilling depreciation is a pressing concern for economists, policymakers and other stakeholders.
The Bank of Uganda’s October 2026 Monetary Policy Statement confirms the severity of the situation, as it notes that the global environment has ‘changed significantly’ owing to the escalating conflict in the Middle East, leading to ‘intensified depreciation pressures’.
This has been compounded by a deterioration in the current account deficit, which widened by $1.4 billion to $ 4.6 billion, driven by lower agricultural commodity prices, reduced tourism receipts, and soaring oil prices. While some pressures originate abroad, Uganda’s vulnerability reflects deeper structural weaknesses that demand our attention.
Our immediate priority must not only be to prevent further weakening of the shilling, but also to protect the economy from excessive volatility, imported inflation, and foreign exchange shortages. The Bank of Uganda’s decisive action of raising the Central Bank Rate (CBR) by 225 basis points to 12.0 percent and the Cash Reserve Requirement (CRR) to 13.5 percent is a necessary measure to contain inflationary pressures and anchor expectations.
However, monetary policy alone cannot resolve the structural foreign exchange imbalances, which are largely supply side in nature. Exchange rates reflect the interaction of foreign-currency supply and demand, expectations, capital flows, and underlying economic conditions. The Bank of Uganda’s assessment highlights that the goods deficit worsened to $ 2.8 billion in the 12 months to August 2026, while the services deficit deteriorated to $ 3.3 billion largely owing to freight charges.
Higher oil prices, seasonal import requirements, and dividend payments abroad further widen the imbalance. Expectations can intensify these pressures; when businesses and households anticipate further depreciation, they may bring forward dollar purchases, reinforcing demand and adding to downward pressure on the shilling.
Depreciation itself is not necessarily a sign of policy failure. Under a flexible exchange-rate regime, the currency can adjust to changes in global prices and domestic conditions. The danger arises when adjustment becomes disorderly, feeds inflationary expectations, or exposes businesses and financial institutions to unsustainable foreign-currency liabilities.
The international experience from Mexico in 1994 to Thailand in 1997 shows that interventions are only effective when consistent with credible monetary and fiscal policies. Selling dollars may restore liquidity during disorderly trading, but it cannot permanently offset sustained import demand or insufficient foreign exchange earnings.
Intervene selectively, not defensively. Foreign exchange sales should be used to address exceptional volatility or impaired market liquidity, not simply because the shilling crosses a certain level. Crucial indicators to warrant action should include unusually rapid price movements, widening bid-offer spreads, and abnormal changes in market turnover, with an assessment of economic fundamentals.
There is a need to manage derivatives prudently. Swaps and other instruments can support liquidity, but may create hidden exposures. Regular stress testing and transparency are essential.
It is also crucial to maintain monetary-policy credibility. Raising the CBR helps contain inflation, but tightening policy solely to attract short term foreign capital could raise borrowing costs and weaken private investment. Clear communication is vital to balance inflation control with growth because foregone GDP growth also implies foregone revenues.
Above all, the Ministry of Finance needs to complement monetary policy with credible fiscal management. Persistent fiscal pressures and poorly prioritised expenditure can weaken confidence and increase external financing needs. Fiscal discipline should go hand in hand with protecting productive investments in infrastructure, agriculture, energy, and export-oriented industries.
Uganda must also expand and diversify foreign exchange earnings. Improving agricultural productivity, adding value to coffee and other exports, strengthening tourism, and supporting export-oriented manufacturing will reduce vulnerability to external shocks.
While oil revenues are expected in the future, current efforts should focus on preserving reserves, sustaining monetary policy credibility, and building resilience through diversification.
The objective should not entirely be to defeat the dollar but, rather, to build an economy that earns more foreign exchange, uses it productively, and can withstand external shocks without sacrificing price stability, investment, and economic growth.