The Uganda shilling has come under renewed pressure, falling sharply against the US dollar as rising global oil prices, increased demand for foreign currency and disruptions linked to the Middle East conflict weigh on the local currency.
The shilling traded around Shs3,917 to the US dollar on Monday, before the Bank of Uganda opened Tuesday’s trading at about Shs3,903 and the currency weakened to approximately Shs3,920 by midday. This represents a depreciation of about 5.8 percent from the August average of Shs3,704.51.
The latest available market reporting on September 16 puts the dollar around the Shs3,900–Shs3,930 range, although rates differ between banks, forex bureaux and other market platforms
The latest depreciation comes as global oil prices remain elevated following disruptions and uncertainty surrounding oil supplies from the Middle East.
Brent crude was trading at more than $107 per barrel on Wednesday, after briefly rising above $109 earlier in the week. Although prices eased slightly following efforts by Saudi Arabia to reroute some crude supplies, the market remains sensitive to further disruptions.
For Uganda, the effect is significant because petroleum products are imported and paid for in US dollars.
As fuel importers demand more dollars to finance purchases, pressure increases on the foreign-exchange market. The weaker shilling then makes the same quantity of imported fuel more expensive in local currency.
This creates what economists describe as a double pressure—higher international oil prices combined with a weaker domestic currency.
The movement of the Ugandan shilling also stands out when compared with some neighbouring currencies.
In Kenya, the shilling has remained relatively stable. It traded at about KSh129.45 to the dollar in the week ending September 10, compared with KSh129.48 a week earlier.
Tanzania’s shilling has also shown greater stability, trading at about TSh2,637.97 per dollar at the close of the week ending September 11.
This does not mean Kenya and Tanzania are unaffected by the global oil shock. Rather, the different movements highlight how domestic foreign-exchange conditions, import requirements, reserves, capital flows and central-bank policies can influence how individual currencies respond to the same international pressure.
For Uganda, the recent movement has been particularly rapid. The shilling had spent much of the previous period trading within a relatively stable range before breaking through the Shs3,900 level.
The biggest concern is the effect on the cost of living and the cost of doing business.
Fuel prices have already moved close to Shs7,000 per litre at some stations. Daily Monitor reported petrol prices of up to Shs6,899 per litre at some Total stations, while diesel was selling at about Shs6,699.
If the shilling remains weak while international oil prices stay high, several sectors could feel the impact.
Transport costs could rise as operators spend more on fuel.
Food prices could also come under pressure because farmers, traders and distributors depend on fuel to produce and transport goods.
Manufacturers that import machinery, raw materials or other inputs could face higher costs.
Businesses importing goods will need more shillings to purchase the same amount of merchandise in dollars.
Consumers could ultimately bear part of these additional costs through higher prices.
The pressure is already visible in import transactions. A trader paying for a $20,000 shipment at an exchange rate of Shs3,775 would require about Shs75.5 million. At Shs3,917, the same dollar payment would require approximately Shs78.34 million, an increase of about Shs2.84 million, before taxes and other costs.
A weaker currency can also benefit some sectors.
Exporters of commodities such as coffee, gold and horticultural products receive more shillings when they convert their dollar earnings.
Ugandans receiving money from relatives or businesses abroad can similarly receive more local currency for every dollar sent home.
However, these benefits can be offset if imported fuel, machinery and other production inputs become substantially more expensive.
The immediate direction of the shilling will depend partly on what happens to international oil prices and the security situation in the Middle East.
If oil prices remain above $100 for an extended period, Uganda could continue facing strong demand for dollars from fuel importers.
If international tensions ease and oil prices fall, some of the pressure on the shilling could also reduce.
The Bank of Uganda’s approach is therefore likely to remain important. The central bank has historically intervened in the foreign-exchange market to smooth excessive volatility rather than permanently defend a particular exchange-rate level.
For ordinary Ugandans, however, the issue is already being felt beyond the forex market. A weaker shilling combined with expensive fuel could eventually translate into higher transportation, production and household costs.
With the dollar now trading around the Shs3,900 level, businesses and consumers will be watching closely to see whether the recent depreciation is temporary or marks a more sustained shift in the exchange rate.
