The Uganda Shilling’s slide past Shs 4,300 to the dollar has prompted one question above all others from clients this month: is this a temporary shock that will reverse, or something more lasting?
Global pressures (high oil, a stronger dollar, and rising US yields) sparked the decline, but local factors drove its size. The shilling was overvalued and held up by foreign bond inflows; as that capital leaves, the currency is simply adjusting to reality.
My working estimate is that about a quarter of this year’s depreciation reflects the shared external shock. The other three-quarters reflects the unwinding of prior overvaluation and a higher domestic risk premium.
The encouraging part is that the real exchange rate now appears to have absorbed most of the misalignment. The numbers: The shilling opened 2026 at about Shs 3,623 to the dollar. On 12 October it touched Shs 4,143, its weakest level since 1993, and it is trading around Shs 4,300 this week.
That is roughly 14 per cent more Shillings per dollar since January. Most of the damage is recent: as late as July, the Bank of Uganda reported only 3.3 per cent depreciation year-onyear. The regional picture is the most telling evidence.
Over the past year, the Uganda Shilling has lost about 16.6 per cent of its dollar value. The Tanzania Shilling has lost 6.7 per cent, and the Kenya Shilling just 0.4 per cent. The divergence sharpened from September: since August, the Uganda Shilling has fallen about 10 per cent, while its two neighbours have been broadly flat.
All three face the same oil bill and the same dollar. Why this is a correction? The IMF flagged the starting point well before the sell-off. Its 2026 staff report assessed Uganda’s 2024 external position as moderately weaker than fundamentals implied, with the real effective exchange rate (REER) about 6.7 per cent overvalued.
The currency then strengthened further in real terms: by 3.3 per cent in FY2024/25 and 4.8 per cent in FY2025/26. Part of that was earned. Coffee lifted the terms of trade by 8.1 per cent and 12.6 per cent over those two years.
Netting off that improvement, I estimate the misalignment had widened to roughly 8 – 12 per cent by mid-2026. That is my estimate, not an IMF figure. Foreign capital, not trade, kept the shilling elevated.
In the financial year ending June 2026, the financial account posted a $6.4 billion surplus (including $1.7 billion in foreign investment into Ugandan securities). As the IMF highlighted, these investors were attracted by high real yields on government debt.
However, a currency underpinned by carry trade inflows rather than current account strength is inherently vulnerable to sharp repricing when capital flows reverse. The external shock is real, but shared.
None of this dismisses the external pressures. Brent crude is around $107 a barrel, up about 75 per cent on a year ago, as tensions around the Strait of Hormuz disrupt supply. The Bank of Uganda estimates that these headwinds widened the current account deficit by $1.4 billion to $4.6 billion.
The dollar itself has firmed only modestly, up about 3.5 per cent over twelve months on the DXY index. The sharper channel is global interest rates. With US 10-year Treasury yields above 5 per cent, Citigroup estimates that over $200 million left Uganda’s bond market in two weeks as offshore investors moved into higher-yielding dollar assets.
But Kenya and Tanzania import the same oil and face the same Federal Reserve. If the external shock were the main driver, the three currencies would have moved together. They have not.
What amplified the move at home? Three Uganda-specific factors turned a regional headwind into a sharp repricing: Positioning: Offshore holdings of local bonds built up during the carry years.
Market analysts now cite that outstanding exposure as the main source of ongoing pressure. Confidence: Investors are still assessing how the Protection of Sovereignty Act 2026 will be applied to foreign capital flows, a risk the Bank of Uganda itself raised during the bill’s passage.
The Ebola outbreak has added to caution. Neither effect has been measured yet, and both can ease as clarity improves. Timing of first oil: Commercial production is now expected in the second half of FY2026/27.
The structural source of dollar earnings that would steady the shilling is still a few quarters away. The policy response has been decisive. On October 14, the Bank of Uganda raised the Central Bank Rate by 225 basis points to 12 per cent, lifted the cash reserve requirement to 13.5 per cent, and sold about $30 million in its first direct intervention since June 2022.
That restores a meaningful real yield on shilling assets, which is precisely what returning portfolio investors need to see.
Putting it all together, my indicative attribution of the roughly 14 per cent move since January suggests that about half of the shift (six to eight percentage points) was driven by the unwinding of carry-supported overvaluation, consistent with the IMF REER gap and subsequent real appreciation net of terms of trade.
The remaining move is split roughly equally between external and domestic factors: shared external shocks, such as oil price spikes, a stronger US dollar, and rising global yields, account for about a quarter (three to four points), supported by the fact that regional peers Kenya and Tanzania remained broadly flat over the same period.
The final quarter (three to four points) reflects an elevated domestic risk premium linked to market positioning, investor confidence, and oilrelated timing, particularly evident during the September–October divergence.
While these judgment-based estimates have overlapping categories and higher global yields acted as the initial trigger, the overall magnitude of the reaction ultimately highlights Uganda’s underlying positioning.
What it means for investors: If this is mainly a correction, the shilling is now closer to fair value than at any point in two years. Adjusting for inflation, the move since January has absorbed most of my estimated misalignment, so further weakness from here looks more like overshoot than correction.
Shilling assets: A 12 per cent policy rate with inflation at 4.6 per cent restores a meaningful real yield. For longterm domestic investors, the case for Shilling fixed income has improved, not deteriorated.
Offshore investors: The entry exchange rate is about 14 per cent better than in January, with much of the valuation risk already taken out. Dollar obligations: Importers and borrowers with dollar costs should hedge on rate dips rather than assume a quick return to Shs 3,600.
I expect the shilling to settle in a range from the high Shs 3,800s to the low Shs 4,000s as the rate hike works through. The main risk is a further escalation in the Gulf or another wave of bond outflows, which could push it past fair value for a time.
The supports are the 12 per cent policy rate, coffee earnings of about $2.4 billion a year, and reserves of about $6.7 billion. A more lasting turn will come with first oil. The takeaway: A currency correction is uncomfortable, but it is not a crisis.
Uganda enters this period with adequate reserves, a credible central bank response and a major new export stream on the horizon. Correcting the overvaluation now is the healthier path to a stable shilling once oil revenues begin to flow.
The writer is the Managing Director and Chief Investment Officer of Alpha Asset Managers Limited. The views expressed are his own and do not constitute investment advice.