Bank of Uganda Governor Dr Michael Atingi-Ego has cautioned against relying on the central bank to defend the Uganda Shilling against depreciation, saying lasting exchange rate stability will depend on increased exports, tourism earnings and domestic production.
Atingi-Ego said the Bank of Uganda could only intervene in the foreign exchange market to moderate sharp fluctuations in the short term, warning that prolonged intervention would drain the country’s foreign exchange reserves.
He made the remarks while appearing before Parliament’s Committee on Commissions, Statutory Authorities and State Enterprises (COSASE), where he explained the factors behind the pressure on the Shilling.
The Governor attributed the depreciation partly to a deterioration in Uganda’s current account balance, which has created a gap between the supply and demand for foreign currency.
He cited the Ebola outbreak, which prompted some countries to issue travel advisories against Uganda, leading to a decline in tourist arrivals and foreign exchange earnings.
Although he did not give exact figures, Atingi-Ego estimated that tourist arrivals dropped by more than 30 per cent, significantly affecting the country’s tourism receipts.
He also pointed to tensions in the Middle East and disruptions around the Strait of Hormuz, which have affected shipping routes and increased the cost of transporting and insuring imported goods, including petroleum products.
According to the Governor, importers consequently need more dollars to purchase the same quantities of goods, adding further pressure to the demand for foreign currency.
He said the situation had been compounded by increased government debt servicing costs, further widening the imbalance in Uganda’s external accounts.
Atingi-Ego explained that when foreign exchange inflows decline while demand for imports remains high, the pressure is eventually reflected in the exchange rate.
He said the central bank had two options: use its foreign exchange reserves to meet the shortfall in the market or allow the Shilling to adjust until demand and supply of dollars reach a new balance.
The Bank of Uganda opted for the latter to protect its reserves, which stood at approximately US$6.7 billion at the time, saying the funds were needed to meet essential national obligations.
He disclosed that government requires about US$1.55 billion annually to service its debt, in addition to between US$450 million and US$500 million for government imports.
This brings the annual foreign exchange requirements for government transactions to approximately US$2 billion, much of which is facilitated through the central bank.
The Governor also attributed some of the pressure on the Shilling to developments in the United States, where Federal Reserve interest rate decisions have made dollar-denominated investments more attractive to international investors.
He said some foreign investors holding Uganda government securities had started selling their Shilling-denominated investments and converting the proceeds into dollars, increasing demand for the American currency.
Responding to the explanation, COSASE Chairperson Muwada Nkunyingi urged the Bank of Uganda to do everything within its means to stabilise the Shilling and address the prevailing exchange rate pressures.
