The shilling is the week's story, and everything else follows from it

The shilling fell to a record low of Ugx 4,495 per US dollar on 27 October, losing 19.48% of its value against the dollar since the start of the year. The Bank of Uganda has tried to slow the fall by raising its Central Bank Rate by 2.25% to 12.00% on 14 October, the highest since December 2016. Dealers also report that it has sold about Usd 30 million into the market, which the Bank has not confirmed and which would be its first direct intervention in more than four years. So far, neither measure has managed to stop the shilling from weakening.

The impact is already showing in government borrowing costs. At the Treasury bill auction on 21 October, the 364-day T-bill yield rose to 14.502%, about 3% above its level at the end of September. On Wednesday, 28 October, the government returns to the bond market seeking Ugx 1.4 trillion through reopened bonds maturing in 2, 5, 15 and 25 years and comes after September’s budget deficit came in at more than seven times the planned level.

External pressures are adding to the challenge. Brent crude above Usd 116 per barrel makes fuel imports more expensive, while a 4% fall in gold prices threatens export earnings because gold now accounts for three-fifths of Uganda’s export earnings. The US Federal Reserve also announces its interest-rate decision on 28 October. It is expected to hold rates steady this month, while markets have largely priced in a further increase in December.

Prepared by Lutaaya Emmanuel Victor and Busobozi Glen

A. Last week

What the Bank of Uganda has done

The Bank has taken two unusual steps to try to support the shilling. First, on 14 October, an unscheduled meeting of the Monetary Policy Committee raised the Central Bank Rate by 2.25% to 12.00%, its highest level since December 2016.

Second, the Bank has reportedly started selling dollars directly into the market to help meet demand and ease pressure on the shilling. Numerous outlets reported a sale of approximately Usd 30 million, although the Bank has not confirmed it. The Governor of the Bank of Uganda said the Bank’s last sale of dollars had been in June 2022.

The Bank’s ability to keep selling dollars is limited by its reserves. At the end of June 2026, it held Usd 6.7 billion, enough to cover 3.7 months of imports, while the current account deficit stood at Usd 4.6 billion. These reserves can help calm the market, but they may not be enough to stop the shilling from falling if demand for dollars remains high. The continued weakening since 14 October suggests that market pressure remains strong.

What this means for someone investing in shillings

For someone who measures their savings in dollars, earning interest on a shilling investment may not be enough to protect the value of their money. If the shilling weakens, converting the investment back into dollars can leave them with less than they started with, even after earning interest.

With the shilling having lost 19.48% of its value against the dollar this year, a shilling investment would need to earn about 24.1% just to break even in dollar terms. By comparison, the 364-day T-bill offers an after-tax return of 11.46%. This is well below the break-even level, as are all the government bonds discussed in Section D after tax.

However, the picture is different for someone who earns and spends entirely in shillings. For them, the key question is whether their investment return beats inflation and preserves their purchasing power. On that measure, the Treasury bill is comfortably ahead of inflation.

Where the money is going

Government interest payments reached Ugx 715.46 billion in September, including Ugx 628.63 billion on domestic debt, about a quarter of the month’s revenue. Meanwhile, donor-funded development spending reached only 70.1% of plan. The government raised Ugx 2,281.93 billion through three September auctions, but Ugx 735.56 billion went towards replacing maturing debt. In the first quarter, it issued Ugx 8,878.9 billion in securities, with more than three-quarters used to refinance old debt.

The wider economy

Annual inflation rose to 4.6% in September, from 4.1%, with core inflation at 3.7% and energy, fuel and utilities inflation at 14.5%. Food-crop inflation also increased, from 2.1% to 4.5%, partly because poor weather reduced supply. The shilling weakened by 3.7% in September, averaging Ugx 3,868.87 per dollar, and has since fallen further to Ugx 4,495.48 on 27 October.

Imports rose 66.5% year-on-year to Usd 2,309.12 million in August, while exports rose 40.6% to Usd 1,492.09 million. Coffee earnings fell 10.9% from July to Usd 181.65 million as shipments declined following poor weather, despite a higher average price. Gold now accounts for about 60% of exports, with almost all of it sold to the United Arab Emirates.

Economic activity is still growing, although some indicators have weakened. The purchasing managers’ index fell from 55.0 to 53.0 but remained above 50, which signals growth. Private-sector credit grew 19.0% year-on-year to Ugx 28,615.43 billion in August, while banks’ bad loans fell to 2.61% of gross loans at the end of June. However, average shilling lending rates had already risen to 17.90% in August, before the October policy-rate increase.

What this means for investors

• Government borrowing is likely to remain heavy. Revenue is about 9% below target, and much of the borrowing is being used to repay maturing debt. This supports demand for government securities but also means the government may have less room to avoid expensive borrowing.
• Yields are rising, increasing the cost of government debt. Interest payments already consume about a quarter of monthly revenue. Higher borrowing costs could eventually leave less money for other government needs and compete with private-sector lending.
• September’s yields are outdated. The one-year Treasury bill averaged 11.5% in September and the 25-year bond 16.3%, but the one-year bill reached 14.502% on 21 October. Investors should compare current offers with current yields, not September’s figures.
• Banks remain relatively healthy, but higher rates pose a risk. Strong credit growth and fewer bad loans are encouraging for listed bank shares. However, higher interest rates and heavy government borrowing could slow private-sector lending.
• Inflation will determine how attractive returns really are. September inflation was 4.6%, below government securities’ after-tax yields, meaning investors are currently earning positive returns after accounting for inflation. However, the 7.25% inflation figure used in Section D is the Bank of Uganda’s forecast for the year ahead, not the current inflation rate. If inflation rises as expected, the purchasing-power benefit of those returns will narrow.

Oil: imports are becoming more expensive. Brent crude rose to Usd 116.72 per barrel on Friday, 23 October, up 3.1% in one day and 6.2% over the week. This was its third consecutive weekly gain and its highest closing price since 29 April. At the start of October, it was below Usd 97. Rising tensions around the Gulf, including attacks on Saudi oil facilities and concerns about conflict involving Iran, have raised fears of supply disruptions. Brent eased by 0.8% to Usd 115.81 on Monday, as hopes of reduced hostilities emerged, but remained near six-month highs. For Uganda, which imports all its fuel, higher oil prices mean a bigger dollar bill for the same amount of fuel. This increases demand for dollars, puts pressure on the shilling and raises transport and food costs.

Gold: export earnings face pressure. Gold prices fell 4.12% over the week, dropping below Usd 4,000 an ounce for the first time since mid-July and touching Usd 3,975.23. December gold futures settled at Usd 4,007.90. Higher oil prices have renewed fears of US inflation and further interest-rate increases. Because gold does not pay interest, it becomes less attractive when interest rates rise. A stronger dollar has also weighed on prices. Investors selling technology shares also sold gold to raise cash. Gold opened this week near Usd 4,033, but Standard Chartered’s commodities research head warned that prices could lose support quickly if gold falls below Usd 3,886. Lower gold prices matter to Uganda because gold accounts for about 60% of its export earnings.

Coffee: Uganda faces lower prices for its main variety. The November London robusta contract, which is particularly relevant to Uganda, fell 5.45% over the week to Usd 3,228 per tonne on 23 October. Supply is increasing: robusta stocks in exchange-approved warehouses reached a 13-month high of 6,488 lots, Vietnam’s September coffee exports rose 53% from a year earlier, and Brazil raised its 2026 production estimate to 67.6 million bags. Arabica prices have held up better because its certified stocks remain near a 27-year low. Robusta prices came under further pressure on Monday as a weaker Brazilian currency encouraged farmers to sell more coffee. The price later recovered to about Usd 3,195 per tonne. The weekly fall of around Usd 186 per tonne is equivalent to roughly Usd 11 less per 60-kilogramme bag, reducing what Ugandan exporters can earn and potentially what farmers receive.

Together, these movements create a double pressure on Uganda: the country is paying more for imports while earning less from exports. This widens the trade gap and adds to the pressure on the shilling.

The US Federal Reserve: another risk for the shilling

The US Federal Reserve meets on 27–28 October and announces its decision at 9pm Kampala time on Wednesday, 28 October, the same evening as Uganda’s bond auction. In September, it raised its policy rate by 0.25% to 3.75%–4.00%, its first increase since 2023. Markets put the chance of no change this week at about 90%, while pricing in close to a 75% chance of at least one more increase by year-end. These are market expectations, not confirmed decisions. A Reuters survey found that 94 of 100 economists expected no change this week, while all 100 expected a further increase on 9 December to 4.00%–4.25%.

The main concern is inflation. US consumer prices rose 3.7% in the year to September, largely because of energy costs, while employers added only 29,000 jobs. With no new rate projections due at this meeting, investors will focus on Chair Kevin Warsh’s comments and whether any policymakers disagree with the decision.

For Uganda, higher US interest rates can make American investments more attractive compared with Ugandan government bonds. Foreign investors hold close to Usd 3 billion in Uganda’s government securities, about 12% of the total, and Citigroup estimates that around Usd 200 million left Uganda’s markets over two weeks as investors sold. When foreign investors sell Ugandan securities and move their money abroad, demand for dollars increases, putting further pressure on the shilling.

A message from the Fed supporting a December rate increase could strengthen the dollar and keep pressure on the shilling through year-end. A more cautious message could give the shilling some breathing room. Either way, markets are not expecting a US rate cut this year, limiting the prospect of relief from a weaker dollar. This is one factor behind the high yields Uganda is offering at Wednesday’s bond auction. Meanwhile, the European Central Bank held its policy rate at 2.50%.

The reasoning

Start from the one-year, not from September. A 364-day bill at 14.502% is the live risk-free alternative. For a 2-year to be attractive, it needs to offer a higher return than this, likely in the mid-15% range. Similarly, a 5-year should offer even more, probably over 16%. These figures are before considering any potential changes in the value of the currency.

The 20-year at 16.925% is the anchor for the long end, and it was set before the hike. It cleared on 7 October with the dollar below 4,000. The dollar is now above 4,400 and the policy rate is 2.25% higher. A 15-year and a 25-year pricing today should sit above that 16.925%, which is why both our central cases start with a 17.

Demand should be there. That is the lesson of 21 October. Bidding rose as yields rose. Pension and institutional money has been the reliable bid at the long end all quarter. It took 296% of the 25-year offer in September and 140% of the 20-year on 7 October. We expect Bank of Uganda to fill the long tenors generously again.

What would break this call

Bank of Uganda under-allotting to defend a level. It did exactly this on 9 September, taking 24% of the 20-year offer rather than paying up higher interest rates.

A shilling that stabilises before Wednesday. Friday’s recovery from the 4,500 region to 4,404 was the sharpest intraday swing since 5 October. If that holds into the auction, bidders will demand less and our ranges are too high.

On market yields at 27 October the curve slopes upward along its whole length, from 11.34% at 91 days to 17.74% at 25 years. Most of the rise sits in the first 2 years: the step from 91 to 182 days alone is 1.98%, and the 91-day T-bill to the 2-year bond move is 4.64%. Beyond 5 years the curve flattens (the 10-year and 15-year are only 0.04% apart) before edging up again towards the long end. Secondary yields have settled below last week’s auction cut-offs, the 364-day T-bill at 14.32% against 14.502% at auction. The 91-day T-bill remains 0.66% below the Central Bank Rate of 12.00%, and that dip below the policy rate is still the most unusual feature of the curve.

The tax difference makes 5-year bonds especially attractive

The biggest advantage on this bond curve comes from the tax rate, not the interest rate. The 3-year bond offers a 16.23% return before tax and 12.98% after tax. The 5-year bond offers only 0.5% more before tax, but its after-tax return rises to 15.06%. Compared with the 2-year bond, the 5-year bond gives an extra 2.28% after tax for just 0.75% more in pre-tax yield. For investors who pay Ugandan withholding tax, moving from three years to five years gives the biggest improvement in after-tax returns anywhere on the curve. However, investors exempt from withholding tax, such as licensed retirement schemes, will see a different picture.

Returns after inflation versus returns after currency depreciation

Using the Bank of Uganda’s 7.25% inflation forecast mid point for the next 12 months, every instrument on the curve offers a positive return after tax and inflation. The estimated real return ranges from 1.70% on the 91-day Treasury bill to 8.13% on the 25-year bond. The 364-day bill offers 3.92%, while the 10-year bond offers 7.73%. These figures use a more precise calculation than simply subtracting inflation from the yield, which can overstate returns by 0.12 to 0.59%. Long-term estimates also assume inflation stays near the forecast for many years, which is not guaranteed.

However, the picture changes when returns are measured against the dollar instead of inflation. Since the shilling has lost 19.48% of its value against the dollar this year, an investment would need to earn 24.19% to keep pace with the dollar’s rise. No government security on the curve achieves that after tax. Even the 25-year bond, with an after-tax yield of 15.97%, falls short by 8.22%, while requiring the investor to commit their money for 25 years.

The key lesson is that the right measure depends on what you will eventually spend your money on. If your expenses are in shillings, government securities have comfortably beaten inflation this year. But if you need dollars, or rely heavily on imported goods whose prices rise when the shilling weakens, no instrument on this curve has fully offset the currency loss.

• Bid at Wednesday’s bond auction, and bid non-competitively if your ticket is small. Non-competitive bids are filled in full and this is the one auction mechanism in Uganda that systematically favours the small saver.
• At our central cases the long end is the best real return this market has offered. A 25-year at 17.80% nets 16.02% after the 10% rate, roughly 8.2% real against the Bank’s own inflation forecast. A 15-year at 17.50% nets 15.75% after 10% tax, roughly 7.93% real return. Those are extraordinary numbers for sovereign bonds and they exist because the offshore investors are leaving and the domestic buyer is setting the price.
• The 364-day bill is now a genuine alternative, which it has not been all year. It nets 11.60% after tax at last Wednesday’s auction level, with a one-year horizon and no duration risk, in a market where the currency has moved 11% in three weeks and the policy rate could move again on 12 November. For anyone who may need the money, or who wants to re-price in twelve months, that is a reasonable decision, not a compromise.
• Avoid the 2-year unless it clears above 15.5%. At 20% withholding it has the worst tax treatment on the bond curve, and it sits between a 364-day bill netting 11.60% and a 5-year netting over 14.9% at our central case. Unless it prices generously, it is the one tenor with no argument for it.
• Treat gold and coffee as signals for the shilling rather than as trades. Together they earned about 72% of August’s export dollars, and both fell last week. A recovery in either would mean more dollars coming in and would be the first sign of relief for the currency; further falls would strengthen the case for holding some savings in dollars. If your income depends on coffee, the lower London price and the EU deforestation rule from 30 December are two reasons to fix prices or sales early where you can. Buying gold itself now is mainly a bet on US interest rates rather than on Uganda, because its next move depends on the Fed.

Prepared by Lutaaya Emmanuel Victor and Busobozi Glen

Legacy Hills Investments works alongside a select group of Uganda’s licensed fund managers, giving our clients access to unit trust and money market options across the industry rather than a single house view. The partners below are the names you will see referenced across our research.

1. 01Old Mutual Investment Group Uganda (OMIG) Limited
2. 02Britam Asset Managers Company (Uganda) Limited
3. 03ICEA Lion Asset Management Uganda Limited
4. 04SBG Securities Uganda Limited
5. 05Sanlam Allianz Investments Limited
6. 06GenAfrica Asset Managers
7. 07Cornerstone Asset Managers Limited
8. 08Kura Asset Managers
9. 09Xeno Investments
10. 10NSSF Uganda
11. 11XENO Investments Kenya
12. 12Etica Capital Kenya

The US Federal Reserve meets on 27–28 October and announces its decision at 9pm Kampala time on Wednesday, 28 October, the same evening as Uganda’s bond auction. A message from the Fed supporting a December rate increase could strengthen the dollar and keep pressure on the shilling through year-end. A more cautious message could give the shilling some breathing room. Either way, markets are not expecting a US rate cut this year, limiting the prospect of relief from a weaker dollar. This is one factor behind the high yields Uganda is offering at Wednesday’s bond auction.

Published by Legacy Hills Investments Limited, an independent investment advisor. This newsletter is for general information only and does not constitute investment advice. Figures are drawn from Bank of Uganda’s Monetary Policy Statement of 14 October 2026, its press release for Treasury bills auction No 1236 of 21 October 2026, its Invitation to Tender for the 2, 5, 15 and 25-year reopening bonds of 28 October 2026, and its published daily exchange rates; the Ministry of Finance, Planning and Economic Development’s Performance of the Economy report for September 2026; secondary-market yields as at 27 October 2026; the United States Federal Reserve; Reuters; Citigroup; Standard Chartered; and London and New York commodity settlements of 23 October 2026. Britam Asset Managers, SBG Securities and Cornerstone Asset Managers are Legacy Hills partner fund managers; anything here touching them is written to inform and never to advise. Investors should confirm current rates before making decisions.