The Uganda shilling showed signs of stabilization against the US dollar at the close of the week, with the Bank of Uganda quoting the exchange rate at 3,695.05 buying and 3,705.05 selling on Friday.
This marked a temporary halt in the downward trend that had been ongoing since December 19, 2024, when the shilling traded at 3,633.55 buying and 3,645.55 selling. The local currency had weakened further during the holiday period, reaching a selling rate of 3,707 earlier in the week.
The shilling’s recovery was largely attributed to increased diaspora remittances and a reduction in the demand for dollars over the festive season. As businesses closed for the holidays and the flow of imports slowed, the demand for US dollars weakened.
Rahmah Masagazi, Head of Sales – Global Markets at Absa Bank Uganda, noted that this demand initially came from the energy sector at the start of the week, and later shifted to the manufacturing sector, as remittances from the diaspora slowed down.
At the beginning of the week, the shilling was trading at 3,680/3,690 at commercial banks, but the heightened dollar demand saw it rise to 3,707/3,717 levels midweek. Experts pointed out that while diaspora remittances and agricultural commodity exports traditionally help stabilize the shilling, the low supply of dollars was overshadowed by the persistent demand.
Outlook for the Shilling
Despite the stabilization, Masagazi warned of potential pressure on the shilling in the short term as businesses resumed operations after the end-of-year break. It is anticipated that trading levels will fluctuate between 3,675 and 3,730 as the corporate sector begins to demand more dollars for imports and other business activities.
In a move to manage liquidity and stabilize the economy, the Bank of Uganda conducted a Treasury Bond auction during the week. The auction was highly successful, with a total of 791.17 billion shillings accepted, accounting for 80% of the amount offered.
The yields on the bonds increased across the board, with the two-year bond yielding 16.0%, up from 15.75% in the previous auction; the five-year bond yielded 16.75%, up from 16.0%; and the 15-year bond returned 17.5%, up from 16.75%. The increase in yields reflects rising interest rates and an attempt to control inflationary pressures.
On the global stage, the Euro remained stable against the US dollar at 1.03 on Friday for the third consecutive day. However, the Euro has been under significant pressure for the past four months, primarily due to geopolitical risks and the diverging economic policies between the US and Europe. The swearing-in of US President-elect Donald Trump has added further uncertainty, as his stance on economic policy and tariffs could have far-reaching implications for global markets. The US dollar has been bolstered by expectations that the Federal Reserve may further raise interest rates, strengthening the dollar against other currencies.
As the US administration signals possible trade protectionism, with the imposition of new tariffs on imports, there is growing concern over inflationary pressures within the US economy. This could lead to new data that might prompt further interest rate cuts by the Federal Reserve in the medium term.
The British pound was also under pressure, losing 0.97% against the US dollar over the week, reaching its weakest point since November 2023. The pound’s weakness was driven by concerns over the UK government’s ability to manage its fiscal deficit amid rising borrowing costs. Additionally, the imposition of stricter sanctions on Russia and Iran has contributed to global oil price pressures, which could have knock-on effects on oil-importing countries like Uganda.
Oil Prices and Regional Economic Concerns
Oil prices reached a three-month high, driven by a contraction in US crude stockpiles and tightening supplies from Russia and Iran due to sanctions. Brent crude, a benchmark for global oil prices, was trading around $78 per barrel, representing an increase of over 5% in January. The rising oil prices are of particular concern to Uganda, a net oil importer, as they could exacerbate inflationary pressures and increase the cost of living.
Masagazi highlighted that the stricter sanctions on Russian and Iranian crude have prompted refiners in China and India to seek alternative supplies from the Middle East, further tightening global oil markets. For Uganda, higher oil prices could mean increased costs for fuel and energy, which would have a direct impact on both the consumer and business sectors.
In East Africa, the Uganda-Kenya shilling market remained relatively stable. The Kenyan shilling traded at 28.55 against the Uganda shilling, maintaining steady levels despite global pressures on currencies and commodities.
As Uganda’s economy navigates global market forces, the local currency has shown signs of stabilizing against the US dollar, though experts anticipate continued fluctuations in the short term. The combination of seasonal trends, business resumption after the holiday period, and global economic factors such as oil prices and geopolitical tensions are likely to influence the shilling’s performance in the coming months.
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