Uganda's shilling has depreciated by more than 20% over the past year, creating acute challenges for businesses that rely on imported raw materials. An importer who spoke during this week's monetary policy briefing from the Bank of Uganda described how the currency weakness has raised his liabilities and reduced his profit margins significantly. The shilling's fall means importers need substantially more local currency to purchase the same amount of dollars, adding costs before freight and insurance charges are even factored in.
The Bank of Uganda's Executive Director of Research, Adam Mugume, highlighted a difficult choice facing businesses. He said companies cannot necessarily maintain the same profit margins when exchange rate movements raise their costs and demand weakens. Instead, some businesses may need to reduce their margins to keep products affordable and retain customers, particularly as consumers face rising bills for food, transport and utilities.
The pressure on businesses comes as inflation climbs. Uganda's annual headline inflation increased to 4.6% in September from 4.1% in August, while annual inflation for energy, fuel and utilities reached 14.5%, according to the Uganda Bureau of Statistics. In response, the Bank of Uganda raised its Central Bank Rate by 225 basis points to 12% on October 14, aiming to contain inflation and support the shilling, though higher rates also increase borrowing costs for businesses.
Mugume said the central bank's measures were intended to prevent temporary supply shocks from becoming persistent inflation. However, the outcome remains uncertain and will depend on foreign exchange supply, export earnings, investor confidence and international developments. Businesses exploring lower profit margins face real limits, as they cannot indefinitely sell below sustainable costs while paying salaries and servicing loans.