Ugandan Shilling Maintains Stability Amid Mixed Economic Signals in Early 2025

The Ugandan shilling (UGX) has demonstrated resilience in early 2025, maintaining relative stability against the U.S. dollar despite fluctuations in business activity and external pressures. This stability, however, masks a complex interplay of economic factors, including robust export performance in key sectors, persistent trade deficits, and cautious monetary policy. Below is an analysis of the Ugandan currency’s trajectory and its implications for investors.

Exchange Rate Trends: Volatility Amid Stability

The UGX/USD exchange rate experienced notable swings in Q1 2025, fluctuating between 3,622.51 UGX/USD (March 30) and 3,740.79 UGX/USD (February 2) before settling at an annual average of 3,676.63 UGX/USD. While the currency depreciated slightly over the quarter (-0.3%), the annual rate showed a +0.41% appreciation, driven by stabilization efforts from the Bank of Uganda (BoU).

Key Drivers of Stability: Exports and Monetary Policy

1. Coffee-Driven Export Surge:
Uganda’s economy received a critical boost from coffee exports, which surged 11.4% year-on-year in January 2025. This rebound, following a weak 0.8% growth in Q4 2024, contributed to an 11-month high in economic activity during the quarter. Coffee accounts for roughly 23% of Uganda’s exports, and strong global demand—particularly from Europe—has supported the sector.

2. Controlled Inflation:
Inflation moderated from 3.7% in February to 3.4% in March, remaining within the BoU’s 5.0% target range. Falling food prices (e.g., a -2.1% decline in Irish potatoes) and stable core inflation eased pressure on households. The BoU’s decision to hold the policy rate at 9.75% further reinforced price stability.

3. Improved Business Sentiment:
The Business Tendency Index (BTI) rose to 58.10 in January, near its highest level since 2012, signaling optimism among firms. This confidence, fueled by export gains and declining lending rates (17.37% in December 2024), suggests potential for sustained private sector activity.

Challenges Ahead: Trade Deficits and Fiscal Pressures

Despite these positives, Uganda faces significant hurdles:

1. Trade Deficit Widening:
The trade deficit reached $468.8 million in January, driven by rising fuel imports and sluggish growth in non-coffee exports. Projections suggest it could hit $750 million by 2026, exacerbating pressure on the UGX.

2. Fiscal Deficits:
Government borrowing surged to UGX 2,065.45 billion in January, exceeding targets due to revenue shortfalls. This weakens fiscal buffers, leaving Uganda vulnerable to external shocks.

3. Currency Volatility Risks:
The UGX’s March 30 low of 3,622.51 UGX/USD—the year’s weakest—highlights exposure to global commodity price swings and corporate dollar demand from energy sectors.

Investment Outlook: Opportunities and Risks

Bullish Factors:
- Coffee Exports: Continued demand for Ugandan coffee, especially specialty varieties, offers a reliable growth engine.
- Monetary Policy Stability: The BoU’s conservative approach supports the UGX against abrupt depreciations.
- Business Confidence: The BTI’s near-record levels suggest investment in agriculture and services may pick up.

Bearish Factors:
- Trade Deficit Expansion: Persistent reliance on fuel imports could strain reserves and pressure the currency.
- Fiscal Indiscipline: Rising deficits may force the BoU to raise rates or devalue the UGX, undermining stability.
- Global Commodity Prices: A slowdown in coffee demand or oil price spikes could disrupt export revenues and import costs.

Conclusion

The Ugandan shilling’s stability in early 2025 reflects a careful balancing act between export-driven growth and fiscal/monetary discipline. While coffee exports and controlled inflation provide a foundation for resilience, the economy remains vulnerable to trade imbalances and external shocks. Investors should monitor the BoU’s policy stance and global commodity trends closely.

For now, the UGX’s +0.41% annual appreciation and the BoU’s commitment to a 9.75% policy rate suggest cautious optimism. However, the path to sustainable stability hinges on reducing reliance on imports and diversifying exports—a challenge requiring long-term structural reforms.

In summary, the Ugandan shilling offers opportunities for yield-seeking investors but demands vigilance toward Uganda’s evolving economic landscape.