Ugandan Shilling: A Calm Before the Storm?

The Ugandan shilling (UGX) has defied expectations in 2025, maintaining a narrow trading range against the U.S. dollar despite a cocktail of structural risks. While short-term stability is anchored by tourism growth and central bank interventions, deeper cracks in Uganda’s economy—fueled by energy deficits, geopolitical tensions, and funding cuts—paint a stark picture of long-term vulnerability. For investors, this paradox presents a compelling case to short the UGX or hedge via USD/UGX forwards, capitalizing on the currency’s transient calm before the storm.

Short-Term Stability: Tourism and Central Bank Backstops

The UGX has held steady around 3,650 UGX/USD since early 2025, a 0.41% annual appreciation from 2024 lows. Two factors are propping up the currency:

1. Tourism’s FX Windfall:
   Uganda’s niche tourism offerings—gorilla trekking, safari adventures, and cultural sites—are driving a 12% annual growth in visitor arrivals, with revenue expected to surpass $1.8 billion by 2025. High-spending tourists (spending $111/day on average) are injecting much-needed foreign currency into the economy.

2. Bank of Uganda (BoU) Firefighting:
   The central bank has stabilized reserves through dollar purchases in FX auctions and maintained its policy rate at 9.75%, anchoring inflation at 3.4%—within its 5% ±3% target. Thin trading volumes and low FX demand have further limited volatility.

Long-Term Vulnerabilities: The Perfect Storm Brewing

Beneath the surface, Uganda faces a trifecta of risks that could trigger depreciation:

1. Trade Deficit Time Bomb:
   Uganda’s current account deficit is widening to -8% of GDP in 2025, driven by rising imports of oil-field equipment and fuel. 60% of public debt is foreign-denominated, and the World Bank’s suspension of new loans (since 2023) has left the government reliant on volatile FDI to plug gaps.

2. Energy Dependency and Climate Risk:
   Agriculture—contributing 24% of GDP—remains vulnerable to climate shocks, with 70% of jobs tied to rain-fed farming. Meanwhile, delayed oil production (expected late 2025) risks missing revenue targets, as environmental opposition and technical delays plague projects like Tilenga and Kingfisher.

3. Political and Geopolitical Headwinds:

4. President Museveni’s re-election in 2026 could fuel protests, while cross-border conflicts with DRC rebels threaten stability.
5. The anti-LGBT+ law has cost Uganda its AGOA benefits, slashing export competitiveness.
6. The IMF’s withdrawal of its Extended Credit Facility in 2024 leaves no safety net for fiscal slippages.

Why Short the UGX Now?

The UGX’s current resilience is a mirage. Key catalysts for depreciation loom:

• Delayed Oil Revenue: If oil production slips into 2026, capital inflows will evaporate, worsening the trade deficit.
• World Bank Funding Freeze: With no new loans, Uganda must borrow commercially at punitive rates, increasing debt servicing costs.
• 2026 Election Uncertainty: Fiscal stimulus ahead of elections risks inflation spikes, forcing BoU to raise rates and drain reserves.

Investment Strategy: Hedge Against the Inevitable

Recommended Position: Short USD/UGX forwards with a 6–12 month horizon.

• Why Forwards? They lock in today’s rate (c. 3,650 UGX/USD), profiting if the currency weakens.
• Risk/Reward: A 5% depreciation to 3,833 UGX/USD would yield +5.0% returns on the trade, excluding fees.

Hedging for Businesses: Ugandan firms reliant on imported machinery or energy should hedge 30–50% of FX needs against a post-oil-decision sell-off.

Conclusion: The Calm is Temporary

While Uganda’s tourism and BoU backstops provide a veneer of stability, the structural flaws—trade deficits, geopolitical risks, and delayed oil revenues—guarantee long-term pressure on the UGX. Investors who ignore the warning signs risk being caught flat-footed when the storm breaks. Act now to position for the inevitable depreciation.