Ugandan Shilling Maintains Stability Amid Export Gains and Fiscal Pressures

The Ugandan shilling (UGX) has remained broadly stable against the U.S. dollar (USD) in early 2025, trading within a narrow range of 3,614–3,657 USD/UGX as of May. While the currency faces downward pressure from widening trade deficits and fiscal challenges, its resilience is underpinned by strong coffee exports, disciplined monetary policy, and anticipation of oil production. This article examines the key drivers of stability and vulnerability for the Ugandan shilling, offering insights for investors and policymakers.

Key Drivers of Stability

1. Coffee-Driven Export Surge
   Uganda’s coffee sector has been a critical stabilizer for the shilling. Exports rose by 11.4% year-on-year in January 2025, contributing to an 11-month high in economic activity. Coffee accounts for 23% of total exports, with European demand bolstering revenue. This has helped offset some of the pressures from a widening trade deficit.

1. Monetary Policy Discipline
   The Bank of Uganda (BoU) has maintained a 9.75% policy rate since mid-2024, anchoring inflation at 3.4% in March 2025—within its 5% target range. Controlled inflation reduces household purchasing pressure and supports foreign investor confidence.

2. Oil Sector Development
   The impending start of crude oil production at the Tilenga and Kingfisher fields (expected late 2025) promises a 7.5% GDP growth surge in 2026. This could attract foreign direct investment (FDI), stabilizing the shilling through increased forex inflows.

Pressures on the Ugandan Shilling

1. Trade Deficit Expansion
   Uganda’s trade deficit hit $468.8 million in January 2025, driven by rising fuel imports and weak non-coffee exports. Projections suggest this could widen to $750 million by 2026, straining foreign exchange reserves.

1. Fiscal Indiscipline and Debt Risks
   Public debt is projected to reach 49.9% of GDP in 2025, nearing the government’s 50% ceiling. Revenue shortfalls have forced borrowing to UGX 2,065.45 billion in January 2025, exceeding targets and limiting fiscal flexibility.

2. Global Dollar Strength
   A stronger U.S. dollar—amplified by Federal Reserve policy uncertainty—has pressured emerging market currencies like the UGX. Corporate demand for dollars (e.g., from energy and telecom sectors) contributed to a 0.7% depreciation in January 2025, with the shilling trading at an average mid-rate of 3,688.96 UGX/USD.

3. Geopolitical and Policy Risks
   Uganda’s exclusion from the U.S. African Growth and Opportunity Act (AGOA) and World Bank loan freezes over anti-LGBT+ policies have reduced foreign aid and investment, limiting forex inflows. Meanwhile, border tensions with the DRC and delays in oil project execution add uncertainty.

Outlook and Investment Considerations

The Ugandan shilling’s stability hinges on balancing near-term strengths and long-term vulnerabilities:
- Upside Risks:
- Coffee export growth could accelerate if global prices rise (e.g., due to climate impacts in Brazil or Vietnam).
- Oil production commencement in late 2025 may boost investor sentiment and forex reserves.

• Downside Risks:
• A surge in fuel imports or delays in oil production could worsen the trade deficit.
• Public debt exceeding 50% of GDP may force the BoU to raise rates or devalue the shilling.

Conclusion

The Ugandan shilling’s stability in early 2025 reflects a precarious equilibrium of export-driven growth and fiscal fragility. While coffee exports and BoU policy provide a buffer, the currency remains vulnerable to trade deficits, dollar strength, and geopolitical risks. Investors should monitor two key metrics:
1. Coffee prices: A decline below $2.00/lb (current price: $2.25/lb) could undermine export revenue.
2. Trade balance: A deficit exceeding $700 million quarterly would signal heightened depreciation risks.

Final forecast: The UGX is projected to trade at 3,687 USD/UGX by Q3 2025 and 3,757 USD/UGX by year-end, reflecting gradual depreciation but no acute crisis. For long-term stability, Uganda must diversify exports, curb fiscal deficits, and accelerate oil-sector execution—a tall order but achievable with disciplined policy.