Uganda: shilling loses nearly 6%, central bank imposes 13.5% reserves

The Ugandan shilling has depreciated by nearly 6% against the dollar since the beginning of September. To curb the pressure, the Bank of Uganda will increase the required reserve ratio for commercial banks from 11% to 13.5% starting September 24, thereby withdrawing more liquidity from the system.

On September 17, commercial banks quoted the shilling at 3,925 for buying and 3,935 for selling per dollar, compared to 3,860 to 3,870 a week earlier, according to Reuters. Daily Monitor also reported the rate around 3,920 to 3,930 midweek.

Adam Mugume, executive director for research and policy at the Bank of Uganda, attributes the pressure to several factors, including the demand for dollars from manufacturers and energy sector companies. Uncertainty related to the conflict involving Iran is also prompting some players to purchase foreign currency in advance to protect against further depreciation.

The increase in the required reserve ratio will immobilize a larger portion of deposits with the central bank. In its May monetary report, the Bank of Uganda already explained that this tool is used to absorb banking liquidity and limit the risks of a depreciation of the shilling affecting prices.

The tightening comes as annual inflation reached 4.1% in August, below the central bank’s target of 5%, but with a 14.9% increase in energy, fuel, and utility prices, according to Daily Monitor. Tighter banking liquidity may also reduce the funds available for loans and investments.

A currency trader quoted by Reuters estimates that the shilling could test the 4,000 threshold against the dollar in the coming days. This level would represent, according to the agency, the weakest point ever reached by the Ugandan currency against the greenback.