Is the shilling too strong to boost Ugandan exports?

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The Government embarked on an ambitious strategy of growing the economy tenfold from $49.5b as of financial year 2023/2024 to $500b in the next 15 years.

The strategy hinges on five strategic objectives, key among them; increasing production, productivity and value addition in agriculture for the export market.

Except for gold, Uganda’s leading exports in the 2023/24 financial year were mainly in low-value commodities of coffee, maize, fish and its products and tea. According to development analysts, adding value to maize will result in high-value products such as maize flour, starch, ethanol and animal feeds.

Sébastien Walker, the International Monetary Fund (IMF) resident representative, says the Uganda shilling is trading at a level that could disadvantage exporters and the country’s ambition for export-led growth.

“The latest assessment published in our Article 4 report shows that the exchange rate for Uganda is moderately over-valued,”

Walker said during the Stanbic Economic Insights Symposium at Kampala Serena Hotel on March 11, 2025.

“But it is important to remember that the exchange rate is a price just like any other price and it needs to adjust to equate supply and demand. Hence the importance of exchange rate flexibility to make sure that it stays within the right range.”

In 2024, the Ugandan shilling remained relatively stable, showing a slight bias toward appreciation. The stability was supported by continued inflows from coffee exports, remittances, portfolio investments and foreign direct investment (FDI), which supported demand for foreign currency and mitigated pressure on the exchange rate.

The symposium also discussed key matters including looming conflicts in the region that could disrupt peace and trade. Others included potentially delayed arrival of oil revenues, questioning whether these will truly resolve budgetary issues given existing debt and spending obligations.

In January this year, the Uganda shilling depreciated by 0.7% against the dollar, trading at an average midrate of sh3,688.96 per dollar compared to sh3,664.08 in December 2024, according to the finance ministry report.

However, on a year-on-year basis, the shilling strengthened by 3.1%, rising from sh3,805.03 per dollar to sh3,688.96 in the review period, largely linked to strong FDI inflows.

What strong dollar means

A weaker shilling increases the value of coffee exports in local currency terms, benefiting farmers such as those involved in coffee.

Uganda’s coffee trade is dollar-denominated, so when the local currency depreciates, exporters receive more shillings for their sales abroad.

But the flip side is rising costs for the farmers.

Depreciation of the currency is normally driven by a mix of global factors, including a strong US dollar, rising import demand and capital outflows.

Walker did not clearly give range on what could be the right range for the pair to trade.

Fred Muhumuza, the executive director of Makerere University Business School Economic Forum, said the appreciation of the shilling in the past cost the coffee sector billions. He said the losses were not linked to any slow business, but simply because of the forex exchange rates.

“The exchange rate is too strong to support export-led growth. The tenfold growth strategy requires double digit growth. We can see that the Uganda shilling is resilient, but what is keeping it resilient? It is the inflows, donors and FDI,”Muhumuza said.

“A weak currency is good for our exporters. Any country that seeks to boost exports has a weak currency.

These are conversations we need to have. The big question is at what level should it be for our farmers to make a profit? This is a conversation that no one has engaged in,” he said.

How BOU intervenes in market

Recent trends suggest that a strong currency over the past seven to eight months has been supported by prudent dollar purchasing by importers and corporations, inflows from foreign portfolio investors, remittances and strong exports.

Although the exchange rates are determined by forces of demand and supply, the Bank of Uganda (BOU) may at times intervene to smooth out extreme fluctuations.

While it does not target a fixed exchange rate, its actions aim to bring order in the market and prevent shocks that could harm businesses and consumers. When the shilling is too strong, the central bank may purchase dollars from commercial banks, thus increasing demand for the greenback and preventing excessive appreciation.

When the shilling weakens sharply, the central bank may sell dollars to commercial banks, which then increases dollar supply and stabilise the exchange rate.

“We last intervened on the sell side in June 2022 and we have not sold any dollar to the market since then.

However, for this fiscal year alone, starting from July 2024 to date, we have bought a net of about $900m from the market,” Adam Mugume, the executive director research at BOU, said.

“Dollar supply has been so strong to the extent that we have been able to buy $900m, more than we had projected. And that’s partly why the reserves have recovered.”

While Mugume noted that the exchange rate is influenced by demand and supply forces, he said the central bank regularly computes an “equilibrium exchange rate” based on economic fundamentals to assess the appropriateness of the prevailing rate. However, pinning down a specific target rate is challenging due to the constant fluctuations driven by global economic factors.

“The exchange rate depends on global economic perspective and very many things that are happening at any given time. It is really not a number that you can quickly pin because price moves within seconds,” he said.

“The dollar tends to follow the direction of the global economy. While there has been talk of a recession, it is still speculative. Overall, tariffs introduce volatility into the global economy, and an unstable exchange rate negatively impacts both the domestic and global economies.”

Forecasts by Stanbic economists suggest a modest depreciation in the first half of the year followed by stability in the latter half.

The stability in the latter half is anticipated due to the traditional coffee season and continued strong coffee prices into 2025, which are expected to sustain the markets.

“From a local perspective, coffee production will continue to rise. The estimate from the Uganda Coffee Development Authority is that you could have about eight million bags of coffee this year. We worry about the retracement in the price being a significant risk to the economy over the coming two years,” Christopher Legilisho, an economist at Standard Bank Group, said.

“Onto the foreign exchange market, we expect a widened current account deficit from around 7% of GDP to around 9% of GDP.

The key driver for the expectation for widening is the investments that the Government is making with regards to the oil sector, investments in imports of capital goods as well as imports of oil products.”

Francis Karuhanga, the chief executive officer of Stanbic Uganda Holdings, said: “In the region, we have had our own share of geopolitics in the DR Congo. The situation in South Sudan continues to simmer and all these things have impact in the businesses.”