Government says economic activity, foreign exchange reserves and remittances remain strong, but a record-low shilling, rising inflation and a central bank rate hike have exposed growing risks to Uganda’s economic outlook.
Government has defended Uganda’s economic performance amid mounting pressure on the shilling, rising fuel prices and tighter monetary conditions, saying growth, foreign exchange reserves and remittances remain strong despite a deteriorating external position.
Deputy Secretary to the Treasury Patrick Ocailap, who is acting Permanent Secretary to the Treasury, said Uganda had “maintained growth momentum despite a challenging global environment”.
Speaking at the release of funds for the second quarter of the 2026/27 financial year, Mr Ocailap said pressures on inflation, the exchange rate and the external sector required “prudent fiscal management and careful prioritisation of public spending”.
He said Uganda’s real gross domestic product (GDP) grew by about 6.4% in the 2025/26 financial year, up from 6.3% in the previous year.
High-frequency economic indicators suggest that the momentum has continued into the new financial year. The Purchasing Managers’ Index averaged 54.5% in the first three months, while the Business Confidence Index stood at 56.6%.
Both indicators remained above the 50-point threshold that separates expansion from contraction.
The composite index of economic activity also rose to an average of 103.59, compared with 102.82 over the corresponding period a year earlier.
Treasury projects economic growth of 7.6% in 2026/27, driven largely by the anticipated start of commercial oil production, continued investment in priority sectors and rising exports.
However, Mr Ocailap acknowledged that the timing of oil production and movements in international oil prices remained “important risks” to the outlook.
On the external sector, he said Uganda’s foreign exchange reserves had increased to $6.7 billion by October 6, 2026, equivalent to 3.74 months of import cover, from $5.6 billion in January.
Remittances from Ugandans living abroad grew by 31.6% to $2.9 billion in the year to June 2026.
Gold and coffee continued to dominate exports, accounting for 56.5% and 13.9%, respectively. However, the merchandise trade deficit widened from $383 million in July and August last year to about $1.04 billion over the same period this year, pointing to growing pressure on the country’s external accounts.
Shilling under pressure
Mr Ocailap acknowledged that the shilling had weakened beyond Shs4,000 against the US dollar, reaching a record low in nominal terms.
He nevertheless argued that currency depreciation should not be confused with a contraction in economic activity.
“A weakening currency does not necessarily mean a shrinking economy,” he said.
According to Mr Ocailap, demand for foreign exchange has been growing faster than supply, contributing to the shilling’s depreciation. He also said the currency had lost less value over five years than several other currencies in the region.
The shilling has lost about 12% against the dollar so far this year, repeatedly breaching the Shs4,000 threshold as demand for foreign currency and pressure on the external position persist.
The depreciation has raised concerns about the domestic cost of imported fuel, machinery, industrial inputs and other essential goods, with the potential to feed into transport costs and consumer prices.
The Treasury released Shs21.8 trillion for the second quarter, representing about 26% of the approved annual budget. Mr Ocailap described the release as part of the government’s fiscal response, which he said would complement measures taken by the Bank of Uganda.
On Wednesday, the central bank raised its Central Bank Rate (CBR) by 225 basis points, from 9.75% to 12%, at a special Monetary Policy Committee meeting. The increase took the benchmark rate to its highest level since December 2016.
In late September, the bank also raised the Cash Reserve Requirement from 11% to 13.5%, requiring commercial banks to hold a larger proportion of their deposits as reserves and reducing the funds available for lending.
The measures are intended to tighten monetary conditions and help contain inflationary pressures, although higher interest rates can also increase borrowing costs for businesses and households.
Mr Ocailap said the Treasury would contain non-essential expenditure while protecting priority programmes.
These include agro-industrialisation, tourism, mineral development, science and technology, as well as critical public services. Other allocations cover infrastructure, health, education, security and preparations for the 2027 Africa Cup of Nations.
Growth outlook faces uncertainty
While the Treasury remains optimistic about the economy, the Bank of Uganda has adopted a more cautious outlook.
Annual inflation rose to 4.6% in September, up from 4.1% in August. The central bank projects that headline inflation could average between 7% and 7.5% over the next 12 months.
It has also lowered its economic growth forecast for 2026/27 to between 6% and 6.5%, from its earlier projection of 7% to 7.5%. The revised outlook is below the Treasury’s 7.6% growth target.
The difference between the two projections highlights uncertainty over the pace of economic expansion, particularly as currency depreciation, imported inflation and tighter credit conditions weigh on the outlook.
The World Bank has also revised its growth forecast for Uganda. Its latest Africa Economic Update lowered the country’s projected growth for 2026/27 to 7.4%, from 8.5%, although it expects stronger expansion in the following financial year as commercial oil production gathers momentum.
The World Bank’s country assessment projects that oil production will begin in the first half of 2027, potentially providing a major boost to economic activity, exports and government revenues.
However, the benefits will depend partly on the timing of production, international oil prices and the extent to which investment translates into domestic economic activity.
The Bank of Uganda has also cited lower coffee and cocoa prices, alongside weaker tourism receipts, among the factors contributing to the deterioration in Uganda’s external position.
For now, the government is counting on continued investment, stronger exports and the anticipated oil sector expansion to sustain growth. But with the shilling under pressure and inflation expected to rise, the challenge will be to maintain economic momentum without allowing currency instability and higher living costs to undermine household purchasing power and business activity.