What next after hike fails to save the shilling?

An importer dialled in to the Bank of Uganda’s emergency planning meeting on October 14 with a complaint that the Shilling’s fall was wiping out his profit. What, he asked, would the Bank do if it kept falling? The Shilling touched 4,143 to the dollar on October 12, its weakest since 1993, and traded near 4,150 this week, about a sixth weaker than a year ago.
The Central Bank answered that afternoon, lifting its benchmark rate, which sets borrowing costs economy-wide, 2.25 percentage points to 12 percent. 
This week, on Thursday, after the jumbo rate hike had failed to stop the Shilling from dropping to a record low 4,295 per dollar, becoming Africa’s worst-performing currency this side of the year, Uganda’s lender of last resort ended up resorting to selling foreign currency reserves to curb volatility. 
A tersely worded notice to commercial lenders indicated that an unspecified amount of forex would be made available. Before, while hiking its key policy rate, Mr Michael Atingi-Ego, the Bank of Uganda (BoU) governor, said the shocks “are externally driven”, including war in the Middle East, expensive oil and rising rates abroad.
Robert Katuntu, the chief investment officer at Alpha Asset Managers, sees it differently. Foreign money chasing Uganda’s high interest rates had held the Shilling up, he argues, and as it leaves, the currency is “simply adjusting to reality”.
The debate echoes a risk this publication flagged in February, and the International Monetary Fund in May, that much of Uganda’s rebuilt dollar cushion came from foreign lenders to its government, money that could leave as fast as it came. Events since fit parts of both arguments that the blows came from abroad, but the fall’s size tracked how much foreign money had come in.

Sudden slide, borrowed cushion
The Shilling averaged 3,704.5 to the dollar in July, only 3.3 percent weaker than a year earlier. Then it fell about 12 percent in under three months, double the 6.0 percent the Central Bank’s own bad-case scenario allowed over a full year. A smaller version came in late 2025, when the Shilling slipped about 6.0 percent, to nearly 3,650 from 3,450, after a large foreign investor hedged, or insured against a currency drop on, a big bond holding. The Central Bank stayed out and the currency steadied. This time it stepped in.
Foreign-exchange reserves are a country’s savings account in dollars, used to pay for imports and calm the currency. Uganda’s roughly doubled in 2025, to about $6 billion. Much came from foreigners who had piled into Ugandan government bonds and Treasury bills, the IOUs a government sells to borrow. An IOU is a written acknowledgement of debt that one party owes another. 
In October 2025, the BoU governor said in the IMF and the World Bank meetings that they held about $3 billion of this debt, up from $700 million to $800 million two years earlier, equal to almost half the reserves.
The IMF said in May they came for “high returns, relative exchange rate stability, and an open capital account.” Markets call this the carry trade, which involves swapping dollars for shillings to lend at rates far above those at home. It pays while the currency holds, but when it falls, losses erase the interest.
In the year through June 2026, foreigners put about $1.7 billion more into Ugandan government debt, drawn by what the Central Bank called “the attractive yields” that were close to 18 percent on the bonds with the longest maturities. Reserves rose by $2.4 billion to $6.7 billion, so foreign bond buying equalled about 70 percent of the gain, by this publication’s calculation. Part of the cushion is itself borrowed. The IMF counted $770 million in short-term dollar loans the Central Bank took from foreign banks, due by March 2028. Without them, reserves covered 2.7 months of imports, below the 3.5 to 4.5 months the Fund deems adequate.
The current account is a country’s running tab abroad, which is earnings from exports, tourism and remittances, minus payments for imports, shipping and foreign interest. In the year through June 2026, Uganda spent $3.6 billion more abroad than it earned, but investment and lending inflows of $6.4 billion covered it. Government borrowing kept rates high. Uganda financed 87.9 percent of its budget deficit at home in the fiscal year ended June and interest on domestic debt rose 37.9 percent to about Shs9.7 trillion.
The IMF expects interest to absorb almost a third of domestic revenue and warned it crowds out business lending. David Calvin Bateme, lead researcher at Crested Capital, a brokerage firm, said in February the Central Bank and Treasury had balanced their policies well. 
Was the Shilling too strong? The IMF judged Uganda’s external position “moderately weaker” than fundamentals warranted. One of its models put the currency’s overvaluation in 2025 at 10.2 percent, another at 2.2 percent, and officials told the Fund the gap was smaller still. Mr Katuntu’s own estimate is 8.0 percent to 12 percent by mid-2026.
The stability was partly managed. During most of 2025, the IMF said, the Central Bank bought dollars whenever the Shilling strengthened, keeping it within about 1.0 percent. Adjusted for inflation against trading partners, it rose 3.3 percent and 4.8 percent in the two fiscal years through June 2025, then fell 4.8 percent in early 2026. 
Some pressures were homegrown. For instance, banks’ spare cash nearly doubled in the three months through July, and Ebola travel restrictions cut tourism. Mr Katuntu says investors are weighing the Protection of Sovereignty Act, signed in May. The Finance Ministry’s officials acknowledged to the IMF the bill’s “potential adverse economic effects”, but Mr Atingi-Ego said this month’s data didn’t show it was a main cause.

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