Ugandan Shilling Firms Slightly Amid Easing FX Appetite

The Ugandan shilling (UGX) entered April 2025 with a cautious optimism, edging higher against the U.S. dollar as the Bank of Uganda (BoU) deftly navigated fiscal and external pressures. Despite lingering vulnerabilities, including a widening trade deficit and elevated borrowing costs, the currency stabilized within a narrow range of 3,660–3,675 UGX/USD, marking a +0.41% annual appreciation. This resilience reflects a nuanced interplay of central bank interventions, export-driven optimism, and market discipline.

Central Bank Interventions Anchor Stability

The BoU’s proactive stance was pivotal in curbing volatility. By actively purchasing dollars through the FX Daily auction, the central bank bolstered foreign reserves and alleviated speculative pressures. The policy rate, held steady at 9.75%, reinforced inflationary anchors, with headline inflation dipping to 3.4% in March—well within the BoU’s target range of 5% ±3%.

The central bank also managed liquidity through treasury bill auctions, offering UGX 355 billion across short-term tenors. However, the concurrent treasury bond auction revealed fiscal strains, with bids for long-term debt exceeding supply by a staggering 60%. This underscored investor demand for higher yields amid uncertainty, with the 5-year bond’s yield spiking to 15.75%, up 25 basis points from February.

Economic Undercurrents: Trade Deficits and Fiscal Pressures

Despite currency stability, Uganda’s economy remains fragile. A widening trade deficit, projected to hit $750 million by 2026, is fueled by rising fuel imports and stagnant non-coffee exports. Compounding this, the government’s borrowing surged to UGX 2,065.45 billion in January 2025, exceeding targets as revenue shortfalls mounted.

Yet, there are mitigating factors. The Business Tendency Index (BTI) climbed to 58.10 in January—near its highest since 2012—driven by export growth and declining lending rates (17.37% in December 2024). Coffee exports, Uganda’s largest forex earner, also benefited from global price hikes, offering a critical buffer.

Risks and Challenges on the Horizon

The shilling’s gains are not without threats. Global commodity price volatility, exemplified by Brent crude surging to $66.69/barrel, could exacerbate import costs. Additionally, spillover risks from Kenya’s IMF negotiations and regional currency pressures loom large. Domestic inflation, though contained, remains susceptible to supply chain disruptions and fiscal slippages.

Conclusion: A Delicate Balance of Hope and Caution

The Ugandan shilling’s slight appreciation in April 2025 reflects the BoU’s success in stabilizing markets through targeted interventions and policy consistency. With inflation anchored, foreign reserves bolstered, and export sectors showing resilience, the currency appears positioned to weather near-term turbulence. However, the economy’s long-term stability hinges on addressing structural challenges: narrowing the trade deficit, diversifying exports beyond coffee, and curbing unsustainable borrowing.

Key data points reinforce this dual outlook:
- Exchange Rate Stability: The UGX’s 0.41% annual appreciation contrasts sharply with a 3% depreciation in 2024, signaling progress.
- Yield Spikes: The 5-year bond’s 25-basis-point yield rise highlights market skepticism about fiscal discipline.
- Business Sentiment: The BTI’s near-14-year high suggests private-sector optimism, but this hinges on sustained export momentum and reduced lending costs.

Investors should remain cautious but constructive. While the BoU’s actions provide a floor for the shilling, structural reforms—not just monetary policy—will ultimately determine Uganda’s economic trajectory. For now, the shilling’s slight firming is a vote of confidence in a carefully managed, if still precarious, equilibrium.