Ugandan Shilling Finds Stability Amid Commodity Booms and Strategic Inflows

The Ugandan shilling (UGX) has maintained remarkable stability in early 2025, defying economic headwinds through a blend of robust commodity exports and strategic inflows of foreign direct investment (FDI) and remittances. While traditional foreign aid has declined, the currency’s resilience is underpinned by strong agricultural exports like coffee and tea, alongside rising investor confidence. However, persistent trade deficits and fiscal challenges loom as critical risks to this fragile equilibrium.

Commodity Exports: The Engine of Stability

Uganda’s agricultural sector, which accounts for 80% of total exports, has been the primary driver of currency stability. Coffee, the largest single export (22-23% of total exports), saw an 11.4% year-on-year surge in January 2025, reflecting strong global demand from European markets. This growth contributed to a record $2.17 billion in Q2 exports, a 12.1% increase from the previous year. Coffee prices rose due to global supply constraints, bolstering foreign exchange earnings and stabilizing reserves.

Beyond coffee, tea, cotton, and fish exports also expanded, supporting the shilling’s appreciation. The currency’s 6.1% annual appreciation in 2024 against major currencies underscores its strength relative to peers in sub-Saharan Africa.

Strategic Inflows: FDI and Remittances

While traditional foreign aid has dwindled—foreign aid to Uganda fell by over 99% from $733 million to $7.6 million in FY2024/25—new sources of capital have emerged. FDI grew by 20.6% in Q2 2025, fueled by oil-sector investments like the Tilenga and Kingfisher projects. These projects, expected to begin production in late 2025, promise long-term economic diversification.

Remittances also provided a critical buffer, reaching $355.6 million in Q2, as diaspora Ugandans sent money home. These inflows, alongside rising domestic revenue collection, helped offset fiscal shortfalls and supported the shilling’s stability.

Challenges on the Horizon

Despite these positives, structural risks threaten Uganda’s economic trajectory. The trade deficit, driven by rising fuel imports and sluggish non-coffee exports, jumped to $468.8 million in January 2025 and is projected to hit $750 million by 2026. This imbalance could strain foreign reserves and pressure the shilling.

Fiscal discipline remains elusive. Government borrowing surged to UGX 2,065.45 billion ($560 million) in January 2025, exceeding targets and weakening fiscal buffers. Public debt, now at 50% of GDP, risks breaching sustainable limits without growth acceleration.

Political and external risks compound these challenges. The World Bank’s suspension of new projects due to Uganda’s anti-LGBT+ legislation and exclusion from the U.S. AGOA trade agreement have limited access to concessional loans, forcing reliance on costlier commercial borrowing.

Conclusion: A Fragile Equilibrium

The Ugandan shilling’s stability in 2025 is a testament to the resilience of commodity-driven exports and rising FDI. Coffee’s strong performance, coupled with oil-sector optimism and remittance inflows, has shielded the currency from severe depreciation. However, the economy remains vulnerable to external shocks, including widening trade deficits, fiscal indiscipline, and global commodity price volatility.

Investors should monitor key indicators:
- Coffee prices: A 10% drop in global coffee prices could reduce export revenue by $150 million annually.
- Trade deficit trends: A deficit exceeding $750 million by 2026 could force the BoU to raise rates or devalue the shilling.
- FDI inflows: Sustained growth in oil-sector investment could offset fiscal pressures, but delays or environmental controversies may derail progress.

In the near term, the UGX is likely to remain stable, supported by prudent monetary policy and commodity gains. However, long-term stability hinges on diversifying exports beyond agriculture, reducing fuel import dependency, and addressing fiscal slippages. Without these reforms, Uganda’s economic growth—and the shilling’s resilience—will remain tethered to the whims of global commodity markets.

Jeanna Smialek is a financial analyst specializing in emerging markets. Her work focuses on currency dynamics and structural economic reforms.