Why the dollar is rising against the shilling

By Joshua Kato, CA

• Uganda’s imports have grown faster than its exports, increasing demand for dollars.

• Fuel costs and global financial conditions can add pressure on the shilling.

• Some imports can strengthen the economy if they lead to future production and exports.

• Kato argues that productivity and foreign-exchange earnings matter more than whether the dollar crosses Shs4,000.

From Shs3,700 to almost Shs3,920 in weeks: the rising dollar is exposing a simple economic reality — Uganda is demanding more foreign currency, while the dollars coming into the economy are not keeping pace.

A Kampala importer receives an invoice for US$500,000 and prepares to pay his overseas supplier. At Shs3,700 to the dollar, the transaction would cost about Shs1.85 billion. At Shs3,920, the same invoice now requires about Shs1.96 billion. The supplier has not increased the price, nor has the quantity changed. The difference is entirely in the exchange rate. For the importer, that is an extra Shs110 million, a powerful reminder that movements in the foreign-exchange market eventually find their way into the real economy.

That is the story unfolding in Uganda’s foreign-exchange market. At the end of August, the shilling was trading at around Shs3,740 per US dollar, but by September 15, it had moved to about Shs3,920–Shs3,930, representing a sharp depreciation in less than three weeks. The question on the minds of businesses, households and investors is therefore straightforward: why is the dollar gaining so quickly against the shilling?

There is no single answer. The current pressure reflects a combination of rising demand for dollars, a growing import bill, energy costs, global financial conditions and movements in foreign-currency inflows. Understanding these forces is important because the exchange rate is not merely a number displayed at a forex bureau. It affects the cost of fuel, machinery, medicines, school fees, imported goods and almost anything Ugandans buy or pay for in foreign currency.

Uganda needs more dollars — At its simplest, an exchange rate is the price of one currency expressed in another. When the dollar moves from Shs3,700 to Shs3,920, it means that Ugandans need more shillings to buy the same dollar. This generally happens when demand for dollars rises faster than the supply available at the previous price.

Uganda does not manufacture dollars. We have to earn or attract them through exports, tourism, remittances, foreign investment, portfolio flows and other sources of foreign exchange. We then use those dollars to pay for imports and other international obligations. The pressure on the shilling becomes more obvious when we look at the latest trade figures.

Ministry of Finance data shows that in July 2026, Uganda’s merchandise imports reached about US$1.612 billion, up 25.4% from US$1.285 billion a year earlier. Export earnings also increased, reaching approximately US$1.402 billion, up 10.1% year-on-year. The important point is not that exports are falling — they are not. It is that imports are growing considerably faster than exports, meaning demand for foreign currency is expanding faster than one of the country’s major sources of dollar earnings.

The pressure was even more pronounced in June. Merchandise imports jumped 33.2% to US$1.882 billion, while exports increased by 11%, pushing the merchandise trade deficit to nearly US$598 million, more than double the previous year’s level. These figures do not mean Uganda is running out of dollars, but they help explain why demand for foreign exchange can become intense at particular times.

The import question is more complicated — It would, however, be misleading to conclude that imports are the villain and that Uganda should simply stop importing. A growing economy needs imports. A manufacturer expanding production may need machinery from China or Europe; a construction company may require heavy equipment; a hospital may need specialised medical technology; an energy company may need imported equipment; and factories may depend on imported chemicals, raw materials and industrial inputs.

This creates an important economic paradox. An investment may require Uganda to spend millions of dollars today before it begins generating additional production and export earnings tomorrow. A company that imports a US$5 million production line, for example, may not immediately earn additional foreign exchange from it. The dollars leave the economy first, while the productive benefits may appear months or years later.

The real question, therefore, is not simply “Why are we importing so much?” but rather “Are the dollars we are spending today creating the capacity to earn more dollars tomorrow?” If imported machinery expands manufacturing, agricultural processing, energy production and exports, today’s pressure on foreign exchange can contribute to stronger foreign-exchange earnings in the future. But if the economy continually imports finished goods without building competitive domestic production, the pressure can become structural.

Fuel adds another layer — Energy makes the situation even more important because Uganda remains heavily dependent on imported petroleum products, which are traded internationally in US dollars. When international energy prices rise, importers require more foreign currency to finance their purchases. At the same time, when the shilling weakens, the local-currency cost of those dollar-priced fuel imports rises even if the international price of oil has not changed significantly.

The effect can spread through the entire economy: higher dollar demand can weaken the shilling; a weaker shilling raises the cost of fuel; higher fuel costs increase transport and production expenses; and businesses may eventually pass some of those costs to consumers. This is one reason the foreign-exchange market matters even to someone who has never bought a dollar.

Uganda’s inflation figures show why this deserves attention. Annual headline inflation rose from 4.0% in July 2026 to 4.1% in August, according to UBOS. The movement remains relatively moderate, but persistent currency depreciation can add to imported inflation, particularly through fuel, machinery, medicines and other imported goods and inputs. What begins with a transaction between a bank and an importer can therefore eventually reach the taxi stage, supermarket, factory gate and household kitchen.

The global dollar is also part of the story — Uganda is not operating in isolation. The US dollar remains the dominant currency in global trade and finance, so developments in international markets inevitably affect the shilling. When investors become more attracted to dollar-denominated assets, demand for dollars can increase globally. Geopolitical tensions can also push investors towards the dollar because of its liquidity and perceived safety.

Recent pressure on the shilling has therefore been influenced by both domestic and international factors. Uganda cannot determine the strength of the global dollar, just as it cannot control every geopolitical development that affects energy prices and international capital flows. What it can influence is the strength and diversity of its own foreign-exchange earning capacity.

Growth itself can create more dollar demand — There is another side to the story that is sometimes overlooked. Uganda’s economy is expanding, and economic expansion requires investment. Investment requires machinery and technology, much of which is imported, and those imports require dollars. A growing economy can therefore temporarily create stronger demand for foreign exchange before the investments begin generating additional production, exports and foreign-currency earnings.

This is why a rising import bill should not automatically be interpreted as evidence of economic weakness. The composition and purpose of the imports matter. Imports that build factories, improve agricultural productivity, expand energy production or create export capacity can be very different from imports of finished products that could competitively be produced locally.

The challenge for Uganda is to ensure that today’s imported machinery, technology and capital goods become tomorrow’s production, exports and foreign-exchange earnings.

There are winners and losers — A weaker shilling also has another side. Exporters receiving dollars can obtain more shillings when they convert their earnings. An exporter receiving US$1 million, for instance, would receive Shs3.7 billion at an exchange rate of Shs3,700, but Shs3.92 billion at Shs3,920.

However, that benefit is not automatic. An exporter who relies on imported machinery, fuel, packaging or chemicals will also face higher costs as the shilling weakens. The objective should therefore not be to celebrate a permanently weak currency or to pursue an artificially strong one. What matters is a stable and predictable currency supported by a productive economy capable of consistently generating foreign exchange.

The real problem is bigger than Shs4,000 — Much of the current discussion is focused on whether the dollar will cross the psychological Shs4,000 mark. But the exact threshold is not the fundamental economic issue. The deeper concern would be an economy in which demand for foreign currency persistently grows faster than the capacity to earn it.

If Uganda wants to become a larger manufacturing, energy, infrastructure and services economy, it will inevitably need substantial amounts of imported machinery, technology and capital goods. The answer cannot therefore be to shut the door on imports. It must be to build a bigger door for foreign-exchange earnings through more competitive exports, value addition, manufacturing, tourism, agricultural and mineral processing, remittances and productive foreign investment.

Most importantly, Uganda must ensure that investment converts imported technology and capital into goods and services that can be sold to the rest of the world.

The current movement of the shilling should therefore not simply be viewed as a currency crisis or as proof that imports are the villain. It is a signal. The market is showing us what happens when demand for dollars rises strongly while global conditions add further pressure to the supply and price of foreign exchange.

Uganda’s export earnings are rising, but imports are rising faster. That is the gap policymakers, businesses and investors should watch closely. The immediate question is not simply whether the dollar will cross Shs4,000. The more important question is whether Uganda can grow its capacity to earn dollars faster than it grows its appetite for them.

Ultimately, the strongest defence of the shilling is not a slogan, a psychological threshold or even a temporary market intervention. It is productivity. It is the factory that produces for export, the farmer who adds value before selling to international markets, the tourism industry that earns foreign currency, and the investment that turns imported machinery into goods Uganda can sell to the world.

Uganda does not need to fear the dollar. But we should understand what it is telling us.

We are building a bigger economy. The question is whether we are building an economy capable of earning enough foreign exchange to pay for it.

Joshua Kato is a Chartered Accountant and Chartered Tax Advisor.