The recent depreciation of the Ugandan shilling against major international currencies, particularly the US dollar, has renewed debate about the health and direction of Uganda’s economy.
For the ordinary businessperson, however, the key question is not simply why the dollar is becoming more expensive, but what domestic and external forces are driving the exchange-rate movement and what it means for businesses, investment and household welfare.
At its simplest, the exchange rate is determined by the supply and demand for foreign currency. When demand for dollars rises faster than the supply entering the economy, the dollar becomes more expensive and the shilling loses value.
Uganda’s current situation reflects this basic economic principle, with businesses requiring more foreign currency to pay for fuel, machinery, industrial inputs, merchandise imports and other international transactions.
One of the important domestic factors is Uganda’s growing import demand. Economic growth and investment require machinery, technology, fuel, spare parts, chemicals, pharmaceuticals and other imported inputs. While these imports can contribute to future economic growth and productive capacity, they also create immediate demand for foreign exchange.
Consequently, a growing economy can experience short-term pressure on its currency when import demand rises faster than export earnings.
The energy sector is particularly important. Uganda relies heavily on imported petroleum products, which are purchased in foreign currency. When international oil prices rise, importers need more dollars to purchase the same quantity of fuel. When this coincides with a weaker shilling, the local-currency cost of fuel rises even further.
Higher fuel costs then spread throughout the economy through transport, agriculture, manufacturing, distribution and retail prices.
Seasonal demand for foreign currency can also intensify depreciation. As businesses prepare for increased trading and import activity towards the end of the year, many importers purchase dollars in advance.
If businesses expect the shilling to weaken further, they may accelerate these purchases. This can create a cycle in which expectations of depreciation increase demand for dollars, which in turn puts additional pressure on the shilling.
However, Uganda’s exchange-rate pressures cannot be explained entirely by domestic factors. The strength of the US dollar internationally, changes in global oil prices, geopolitical tensions, international interest rates and global investor sentiment can all influence Uganda’s currency.
These external shocks are transmitted into the domestic economy through fuel prices, import costs, capital flows and foreign-exchange demand.
Uganda’s ability to generate foreign currency is therefore crucial. The country earns foreign exchange through exports such as coffee and other agricultural products, minerals, tourism, remittances, foreign investment and services.
Uganda has also accumulated substantial foreign-exchange reserves, which provide an important buffer against external shocks. However, reserves are not an unlimited source of dollars. In the long run, sustainable currency stability depends on the economy’s ability to generate sufficient and diversified foreign-exchange earnings.
The depreciation also presents a challenge for monetary policy. When the shilling weakens, imported goods and inputs become more expensive, potentially increasing inflation.
The Bank of Uganda may therefore need to maintain tighter monetary conditions to contain inflationary pressures and keep expectations under control. However, higher interest rates can make borrowing more expensive for businesses, particularly manufacturers, farmers, traders and small and medium-sized enterprises.
Monetary authorities therefore face the difficult task of containing inflation and maintaining financial stability without unnecessarily restricting productive investment.
Fiscal policy is equally important. Heavy government borrowing can put pressure on domestic interest rates and compete with the private sector for available financing.
If government borrowing remains high, businesses may face higher financing costs at a time when they are already dealing with increased import and operating costs. Coordination between fiscal and monetary policy is therefore essential for maintaining macroeconomic stability.
For local businesses, the implications of a weaker shilling are significant. Companies that depend heavily on imported goods and inputs will experience higher costs even when their foreign suppliers do not change their dollar prices.
For example, an importer purchasing goods worth US$10,000 would pay Shs37 million at an exchange rate of Shs3,700 per dollar, compared with Shs40 million at Shs4,000 per dollar. The Shs3 million difference directly affects working capital and profit margins.
Businesses that earn foreign currency, particularly exporters, can benefit from depreciation because their dollar revenues translate into more shillings.
An exporter receiving US$100,000 would receive Shs370 million at Shs3,700 per dollar, compared with Shs400 million at Shs4,000. However, the benefit depends largely on the business’s cost structure.
An exporter that imports most of its machinery, fuel, packaging or other inputs may also experience significant increases in operating costs.
This makes exchange-rate risk management increasingly important for Ugandan businesses. Business owners need to understand how much of their revenue and expenditure is denominated in foreign currency.
They should also prepare budgets based on different exchange-rate scenarios, review prices regularly, diversify suppliers where possible and avoid unnecessary exposure to foreign-currency obligations.
The current depreciation should not, however, automatically be interpreted as a sign that Uganda’s economy is collapsing.
Currency depreciation can sometimes support exports by making locally produced goods relatively more competitive in international markets. The real question is whether Uganda has sufficient productive capacity to respond by increasing exports and domestic production.
This is where the long-term economic challenge lies.
A weaker shilling can become an opportunity if Uganda uses it to strengthen export-oriented production, value addition, agro-processing, manufacturing, tourism, mineral processing and services.
However, if the country remains heavily dependent on imported fuel, machinery and consumer goods without a corresponding expansion in exports, depreciation can mainly translate into higher prices and reduced purchasing power.
The fundamental lesson is that Uganda’s exchange-rate challenge is bigger than the dollar itself. The shilling reflects the underlying balance between what the country earns in foreign currency and what it spends abroad.
Sustainable currency stability cannot depend solely on central bank intervention or the use of foreign-exchange reserves. It requires an economy capable of generating increasingly strong and diversified foreign-exchange earnings.
For the Ugandan businessperson, the message is clear: foreign-exchange risk is now a core business risk rather than simply a banking issue.
Businesses need to understand their currency exposure, protect their profit margins, strengthen local supply chains and explore opportunities in export markets.
For policymakers, the longer-term task is equally clear: strengthen Uganda’s productive capacity, promote value addition, expand exports, maintain credible monetary policy, manage public borrowing carefully and create an environment that attracts productive investment.
Ultimately, the strength of the Ugandan shilling will depend not only on how many dollars the central bank can supply today, but on how many dollars the Ugandan economy can sustainably earn tomorrow.
The most durable solution to currency weakness is therefore not simply defending the shilling, but building an economy that produces, exports and earns more.
By Atusasire Edmund Aka
Researcher
MBA, B.Com, PGD-FM
Former LC5 Chairman Aspirant, Rukiga District
