The shilling is sending Uganda a message
The shilling’s slide to nearly sh4,000 per dollar raises a bigger question: can Uganda’s foreign-exchange earnings keep pace with its growing economy? writes Joshua Kato
Joshua Kato CA. (File)
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OPINION
By Joshua Kato, CA
The dollar is getting more expensive, but the real story is what happens when Uganda’s appetite for foreign currency grows faster than its ability to earn it.
A parent paying school fees denominated in dollars, a businessman settling an import invoice, a manufacturer buying raw materials or a family purchasing a vehicle may all be asking the same question: why is the shilling buying fewer dollars than it did only weeks ago?
The answer is no longer confined to the dealing rooms of commercial banks. It is beginning to reach businesses, households and consumers.
Consider an importer with a $500,000 invoice. At sh3,700 to the dollar, the payment would require about sh1.85b. At sh3,920, the same invoice requires nearly sh1.96b. That is sh110m more for the same goods.
For a large company, that can mean higher working-capital requirements. For a smaller business, it may mean increasing prices, delaying an order or borrowing more money. Eventually, part of that additional cost can reach the consumer through more expensive machinery, medicine, spare parts, building materials and other imported goods.
This is where the exchange rate stops being a financial statistic and becomes an everyday economic issue. The shilling has weakened sharply in recent weeks. After averaging about sh3,704.51 to the dollar in August, it had moved to around sh3,917 by September 15, a depreciation of nearly 6% from the August level.
The immediate temptation is to ask whether the dollar will reach sh4,000. But the more important question is why demand for dollars has increased so rapidly and whether Uganda is generating enough foreign exchange to keep pace with that demand.
Part of the answer can be found in Uganda’s trade figures. According to the finance ministry, merchandise imports reached $1.612b in July, a 25.4% increase from a year earlier. Export earnings also increased, reaching about $1.402b, up 10.1%.
This distinction is important. Uganda is not failing to earn foreign exchange. Export earnings are growing. The challenge is that the demand for foreign currency, particularly for imports and business transactions, has been expanding faster. Yet it would be wrong to conclude that imports are necessarily the problem.
A manufacturer importing a $5m production line is demanding dollars today, but the machinery could produce goods for years. A company importing agricultural equipment, an energy project importing machinery or a hospital purchasing specialised technology is similarly using foreign exchange to build productive capacity.
If imported machinery creates factories, jobs and exports, today’s foreign-exchange outflow can become tomorrow’s foreign-exchange earnings. If the economy instead uses scarce dollars mainly to purchase finished goods that could competitively be produced locally, the pressure can become much harder to resolve.
There is another reason dollar demand can rise even when the economy is performing well: economic growth itself requires imports.
As businesses expand, they buy equipment and raw materials. Construction companies require machinery. Manufacturers need industrial inputs. Households with rising incomes demand vehicles, electronics and other imported products.
This means that a growing economy can temporarily demand more dollars before the investments being made today begin generating additional production and export earnings.
The composition of foreign-exchange demand therefore matters as much as its size.
As businesses expand, they buy equipment and raw materials. Construction companies require machinery. Manufacturers need industrial inputs. Households with rising incomes demand vehicles, electronics and other imported products.
This means that a growing economy can temporarily demand more dollars before the investments being made today begin generating additional production and export earnings.
The composition of foreign-exchange demand therefore matters as much as its size.
Fuel makes this particularly important because petroleum products are internationally priced in dollars. An importer paying $1m for fuel would have required sh3.7b at sh3,700 per dollar, but sh3.92b at sh3,920.
That additional cost does not necessarily remain with the importer. It can move through transport, manufacturing, distribution and eventually consumer prices.
This is one reason currency depreciation can contribute to imported inflation. Uganda’s annual headline inflation rose from 4.0% in July to 4.1% in August, although the finance ministry noted that energy, fuel and utilities inflation actually eased during the month.
The pressure is also being influenced by developments outside Uganda.
That global dimension matters because Uganda cannot control international oil prices, global interest rates or investor sentiment. What it can influence is the economy's capacity to generate foreign exchange.
And this is where the long-term answer lies. Uganda needs more exports, but not merely more exports by volume. It needs higher-value exports.
Agricultural products need greater processing and branding. Manufacturing needs to move further up the value chain. Tourism must continue generating foreign currency. Mineral resources need value addition. Ugandan businesses need to become more competitive in regional and international markets.
The country already has significant foreign-exchange earning capacity. Government data shows total exports of goods and services reached $18.04b in the 12 months to March 2026, compared with $5.93b four years earlier.
The challenge, therefore, is not simply to earn dollars, but to ensure that foreign-exchange earnings grow in step with the economy's appetite for foreign currency.
A weaker shilling also creates winners and losers — An exporter receiving $1m earns more shillings when the dollar rises from sh3,700 to sh3,920. But an exporter who depends heavily on imported fuel, machinery, chemicals or packaging will also see costs rise.
For an importer, the effect is more immediate. For someone servicing a dollar loan with predominantly shilling income, the repayment burden can also increase. That is why exchange-rate stability matters across the economy.
The public debate may eventually become fixated on whether the dollar crosses the psychological sh4,000 mark. But sh4,000 is not the fundamental economic issue.
The deeper question is whether Uganda can build an economy in which the capacity to earn foreign exchange grows faster than the appetite to spend it.
The answer will not come from trying to prevent every movement in the exchange rate. Nor will it come from simply discouraging imports. It will come from productivity.
The factory that produces for export, the farmer who adds value before selling internationally, the tourist who brings foreign currency, the manufacturer that replaces an imported product, and the investor who turns imported machinery into competitive production all strengthen Uganda’s foreign-exchange position.
The shilling is therefore sending Uganda a message. The country is growing. Growth requires dollars. The real challenge is ensuring that today’s demand for foreign exchange creates tomorrow’s capacity to earn it.
The writer is a chartered accountant and chartered tax advisor