Economy
Ugandan Shilling Appreciates for 14 Months: Bank of Uganda Explains Drivers and Implications
The Ugandan shilling has been on a steady upward trajectory for the past 14 months, prompting questions about the factors driving the currency’s strength, the role of the Bank of Uganda (BoU), and what it means for the broader economy. In a detailed three-part explanation, BoU Governor Michael Atingi-Ego clarified the dynamics behind the shilling’s sustained appreciation.
Governor Atingi-Ego emphasised that the central bank has not actively intervened in the foreign exchange market during the period of appreciation. “The currency has indeed appreciated for about 14 months. But let me clarify – the Bank of Uganda did not intervene during that period. Our last sale-side intervention was in June 2022,” he said, highlighting that the shilling’s gains are largely market-driven.
Key Drivers of Appreciation
According to Governor Atingi-Ego, several factors have contributed to the shilling’s resilience:
- Strong coffee and cocoa exports: Uganda’s primary agricultural exports have performed well, generating substantial foreign exchange inflows.
- Higher coffee prices globally: The surge in coffee prices has increased foreign earnings for exporters, supporting demand for the local currency.
- Prudent monetary policy: BoU’s measured policy stance has helped maintain macroeconomic stability.
- Foreign exchange market reforms: Regulatory improvements have strengthened the efficiency and transparency of the FX market.
- Offshore investor inflows: Increased foreign investment has boosted demand for the shilling.
- Weaker US dollar globally: The decline in the dollar’s global value has indirectly supported the shilling.
“These combined factors have contributed to a natural and sustainable strengthening of the Ugandan shilling,” Governor Atingi-Ego explained.
Market-Determined Exchange Rate
The Governor also stressed the importance of allowing the exchange rate to reflect market fundamentals. “It is important to remember that the exchange rate is market-determined. Supporting exporters artificially would risk inflation and higher interest rates. Our focus is preserving stability without distorting fundamentals,” he said.
The shilling’s appreciation has multiple economic implications. A stronger currency reduces the cost of imports, potentially easing inflationary pressures. At the same time, it poses a challenge for exporters, as their foreign earnings are converted into fewer shillings. However, BoU’s approach emphasises stability, ensuring that the currency’s performance does not disrupt economic fundamentals or monetary policy objectives.
Governor Atingi-Ego’s explanation underscores the interplay between market forces, sound economic policies, and global financial trends in shaping Uganda’s exchange rate dynamics. While the shilling’s sustained appreciation is a positive signal for macroeconomic stability, the central bank remains focused on maintaining a balanced approach that supports both domestic stability and international competitiveness.
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