Ugandans pay the price of a weaker shilling

 

Petrol prices have jumped to Shs7,000 per litre from Shs4,000 in September, as the dollar climbs to Shs4,000 from Shs3,700

Kampala, Uganda | JULIUS BUSINGE | Uganda’s government is resisting broad fuel subsidies and artificial support for the shilling, a decision that could prolong pressure on households and businesses but preserve foreign exchange reserves and limit the cost to public finances.

Amos Lugoloobi, the Minister of State for Finance, Planning and Economic Development (Planning), who is currently holding the finance minister’s portfolio, told Parliament on Oct. 13 that the government would assess the causes and likely duration of currency pressures before deciding on further interventions.

The decision leaves households and businesses exposed to the immediate effects of a weaker shilling and rising fuel prices, which have increased transport costs, raised the price of imported goods and pushed up production expenses for local industries. The government is betting that preserving macroeconomic stability will prove less costly than measures that offer short-term relief but strain the budget or distort the foreign exchange market.

Petrol prices have risen from about Shs 4,000 per litre in September to approximately Shs 7,000 on Oct. 13. The dollar has also risen from an average of about  Shs 3,700  to around Shs 4,000 in recent months, increasing the cost of imports and other inputs priced in or linked to foreign currency.

This means that for businesses dependent on imported raw materials, fuel and machinery, the combination threatens to raise operating costs and squeeze profit margins. As a result, companies may pass some of the additional expenses on to consumers, adding to inflationary pressures and reducing households’ purchasing power. Transport operators, manufacturers and traders are particularly exposed to higher fuel and logistics costs.

The government argues that broad fuel subsidies and attempts to artificially support the currency could provide temporary relief but carry substantial fiscal costs. Such measures could divert money from essential public services, weaken confidence in the foreign exchange market and expose the country to further pressure if interventions prove difficult to sustain.

Uganda’s gross international reserves rose to about $6.7 billion as of Oct. 6, from $5.6 billion at the end of January, equivalent to 3.74 months of import cover excluding oil project-related imports.

The reserves provide a buffer against external shocks and help the country meet its international obligations. However, using them extensively to defend the shilling or finance broad subsidies could reduce the cushion available to meet future external payments and manage periods of heightened currency volatility.

Instead, the government intends to prioritise adequate petroleum supplies, reduce avoidable costs and support vulnerable households through targeted measures within approved budget allocations and subsequent budgets.

The approach could help preserve fiscal space and reduce the risk of unsustainable public spending. Its effectiveness, however, will depend on whether targeted support reaches those most affected and whether the government can contain the effects of higher fuel prices on the wider economy.

The Bank of Uganda has maintained its benchmark Central Bank Rate at 9.75%, raised commercial banks’ cash reserve requirements to 13.5% and deployed foreign exchange swaps and other liquidity-management instruments to ease short-term market pressures.

The measures are intended to support price and exchange-rate stability while retaining a market-determined currency regime. Tighter liquidity conditions can help moderate inflationary pressures, although they may also increase borrowing costs or limit credit available to businesses if financial conditions tighten.

Remittances offer a buffer

Beyond the immediate response, the government is seeking to strengthen foreign exchange earnings through its Tenfold Growth Strategy, which prioritises agro-industrialisation, tourism, mineral-based industrial development, oil and gas, and science, technology and innovation.

The government is also counting on remittances from Ugandans abroad, which rose by 31.6% to $2.9 billion in the year ended June 2026, providing an important source of foreign exchange and supporting household spending.

Commercial oil production and exports, expected to begin in 2027, are also projected to generate additional foreign exchange. The government says the proceeds will need to be managed prudently and invested in productive assets to support long-term economic growth.

Other priorities include raising agricultural productivity, expanding tourism, processing minerals and increasing industrial output to diversify exports and reduce unnecessary dependence on imports.

If these initiatives generate stronger and more consistent foreign exchange inflows, the government hopes it could ease pressure on the shilling over time, reduce vulnerability to external shocks and improve the country’s capacity to pay for imports.

But the benefits will depend on how quickly production and exports expand, as well as how much foreign currency the economy continues to require.

For now, the government’s decision places greater emphasis on preserving reserves and fiscal stability than on shielding consumers from the immediate consequences of currency depreciation and higher fuel prices.