Uganda’s foreign exchange reserves have experienced a significant decline, dropping by approximately 12% between June 2023 and January this year. This decline, as revealed by the State of the Economy report issued by the central bank, is primarily attributed to external debt payments and challenges faced by the Bank of Uganda in acquiring foreign currency amidst the depreciation of the Ugandan shilling.
As of June 2023, Uganda’s foreign exchange reserves stood at $4.07 billion. However, by the end of January this year, they had fallen to approximately $3.58 billion. This decline translates to a reserve level of 3.4 months of import cover, excluding imports related to oil projects.
The Bank of Uganda typically sets a target of maintaining foreign exchange reserves equivalent to 4 months of imports, excluding oil projects, as outlined in an International Monetary Fund (IMF) staff report from March.
The decrease in foreign exchange reserves is a matter of concern, especially considering Uganda’s rising public debt. More than half of Uganda’s total debt is external, and servicing this debt has been consuming a growing portion of the country’s revenues. This trend has had adverse implications for various sectors, including education and healthcare.
According to data from the finance ministry, Uganda’s total public debt stood at $24.7 billion at the end of 2023, with 60% of this amount being external debt. The substantial external debt burden has placed significant pressure on the country’s finances and economic stability.
While the decline in foreign exchange reserves is worrying, there are expectations of potential inflows from budget support loans, which could contribute to replenishing the reserves. However, the Bank of Uganda has cautioned that the country’s balance of payments outlook remains uncertain.
Factors such as delayed disbursement of expected budget support loans and higher-than-projected government expenditure on imports pose risks to the reserve build-up program. Additionally, both global and domestic financial market conditions have been challenging, further complicating efforts to stabilize foreign exchange reserves.
The decline in foreign exchange reserves underscores the importance of implementing prudent fiscal and monetary policies to safeguard Uganda’s economic stability. Efforts to manage and reduce the country’s external debt burden while promoting revenue generation and economic growth will be crucial in addressing the challenges posed by dwindling foreign exchange reserves.
Furthermore, enhancing transparency and accountability in debt management and fiscal decision-making processes will help build investor confidence and attract much-needed foreign investment. Strengthening domestic revenue mobilization efforts and promoting export diversification can also contribute to enhancing Uganda’s economic resilience and reducing reliance on external financing.
In conclusion, while the decline in Uganda’s foreign exchange reserves is a cause for concern, proactive measures and sound economic policies can mitigate its impact and pave the way for sustainable economic growth and development. It is imperative for policymakers and stakeholders to work together to address the underlying issues and promote long-term economic stability in Uganda.
