Uganda’s shilling has weakened to a record low despite the central bank’s return to direct dollar sales, highlighting the limits of foreign exchange intervention as demand for dollars and foreign investor outflows continue to pressure the currency.
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The Bank of Uganda reportedly sold up to $30 million on October 14, its first direct intervention in the foreign exchange market in more than four years, as authorities sought to halt the shilling’s sharp depreciation. Currency dealers estimated the size of the sale, although the central bank has not officially confirmed the amount.
The intervention came alongside an emergency 225 basis point increase in the benchmark interest rate to 12 percent, the highest level since December 2016. The combined measures briefly strengthened the shilling to about 3,951 per dollar, reversing its slide beyond 4,100 earlier that week.
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The recovery did not last. The shilling weakened to 4,138 per dollar by October 16 and fell further to 4,191 by October 21, below its level before the intervention. An Absa market report indicated that the central bank did not sell dollars on October 20, as corporate demand for foreign currency and offshore investors’ sales of Ugandan government bonds continued to weigh on the currency.
The renewed intervention marks a shift in the central bank’s approach to managing exchange rate pressure. Governor Michael Atingi-Ego had previously said the Bank of Uganda last sold dollars directly in June 2022, opting instead to use foreign exchange swaps, repurchase agreements and other liquidity management tools.
Those measures allowed the central bank to influence conditions in the foreign exchange market without directly selling dollars from its reserves. The return to outright sales suggests that the latest pressure on the shilling has prompted authorities to adopt a more direct response.
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Uganda’s foreign reserves have increased from about $2.7 billion in the 2022/23 financial year to $6.7 billion, giving the central bank a larger buffer to manage external shocks. However, the country’s current account deficit has widened to $4.6 billion, reflecting the pressure from its external financing needs.
The challenge for policymakers is to stabilise the shilling without placing excessive strain on reserves or undermining economic activity through higher borrowing costs. Interest rate increases can help support a currency by making domestic assets more attractive, but their effect may be limited if businesses continue to need dollars for imports and foreign investors keep reducing their exposure to local debt.
The shilling’s renewed decline after the intervention shows that selling dollars can provide temporary relief without necessarily reversing the forces driving depreciation. The effectiveness of the central bank’s response will depend on whether foreign exchange demand eases and investor confidence improves in the weeks ahead.
Faith Omoboye is a foreign affairs correspondent with background in History and International relations. Her work focuses on African politics, diplomacy, and global governance.
