Ugandan Shilling Holds Steady Amid Thin FX Demand: Structural Challenges and Opportunities

The Ugandan shilling (UGX) has remained largely stable against the U.S. dollar (USD) in early 2025, with the exchange rate hovering around 3,677 UGX/USD as of April. This stability reflects a confluence of factors, including thin foreign exchange (FX) demand, persistent structural economic challenges, and cautious market sentiment. However, underlying vulnerabilities—from trade deficits to external debt—continue to pose risks to the currency’s long-term resilience.

The Drivers of Thin FX Demand

The UGX’s relative stability stems from reduced import activity and lower-than-anticipated demand for foreign currency. Key factors contributing to this include:

1. Widening Trade Deficit:
   Uganda’s trade deficit has surged, reaching $2.7 billion in 2023, driven by imports of $8.3 billion versus exports of $5.6 billion. However, recent data suggests imports grew by just 0.2% in early 2024, a stark slowdown compared to the previous year’s 14.1% surge. This deceleration has temporarily eased pressure on FX reserves.

2. External Debt Servicing:
   Despite an external debt stock of $20.9 billion (46.3% of GDP), Uganda’s FX demand for debt servicing has been partially offset by delayed repayments and renegotiated terms. However, this reprieve is temporary; rising global interest rates could reignite borrowing costs, straining the currency.

3. Remittance and Tourism Flows:
   Remittances—key FX sources—rebounded to $1.4 billion in 2023 after a 7% drop in 2022, while tourism revenues reached $1.6 billion, up from pandemic lows. These inflows, though modest, have cushioned demand for USD.

Structural Weaknesses Lurk Beneath the Surface

While the UGX’s stability persists, Uganda’s economy remains vulnerable to external shocks and domestic inefficiencies:

• Export Dependency on Volatile Commodities:
  Coffee, gold, and agricultural exports—accounting for over 60% of total exports—face global price fluctuations. For instance, coffee revenue dropped 3% in 2023 due to climate impacts and low global prices.

• Infrastructure Gaps:
  Poor transportation and energy networks hinder export competitiveness. A 2023 study found infrastructure quality had no statistically significant impact on economic growth, suggesting systemic inefficiencies.

• Slow FDI Inflows:
  The East African Crude Oil Pipeline, intended to boost exports, faces delays and environmental disputes. Until operational, FDI remains sluggish, limiting USD inflows.

Forecast: UGX Faces Gradual Depreciation Pressure

Forecasts suggest the UGX will gradually weaken against the USD. Trading Economics models project the exchange rate to reach 3,687 UGX/USD by Q4 2025 and 3,757 UGX/USD by 2026, reflecting ongoing structural imbalances.

Investment Implications

For investors, Uganda presents a mixed outlook:

• Opportunities:
• Export-Sensitive Sectors: Invest in companies benefiting from export diversification (e.g., gold mining, horticulture).

• Infrastructure Projects: Target firms involved in energy or transport upgrades, which could improve export competitiveness.

• Risks:

• Currency Volatility: The UGX’s stability is fragile; geopolitical tensions or a surge in import demand could trigger depreciation.
• Policy Uncertainty: Delays in implementing the National Development Plan III—aimed at industrialization and fiscal discipline—could prolong structural issues.

Conclusion

The Ugandan shilling’s stability in early 2025 reflects a temporary reprieve from FX demand pressures, but underlying challenges—trade deficits, debt, and infrastructure gaps—demand urgent attention. Investors should proceed cautiously, leveraging opportunities in export-driven sectors while hedging against currency risks. Without meaningful reforms to diversify the economy and boost exports, the UGX faces gradual depreciation pressure, aligning with forecasts of 3,757 UGX/USD by 2026. The path to long-term resilience hinges on Uganda’s ability to transform its economic structure and attract sustainable foreign capital.