Kampala, Sept. 18 – The Bank of Uganda has raised the cash reserve requirement for commercial banks from 11 percent to 13.5 percent, a 250-basis-point increase, in a bid to defend the shilling as the currency slides toward two-year lows against the US dollar.
The new requirement, set to take effect on September 24, means commercial banks will need to hold a larger share of customer deposits at the central bank rather than lending them out, effectively tightening liquidity across the banking system. The shilling has been trading near 3,925 to the dollar in recent sessions, having weakened by roughly 6 percent, as manufacturers and energy firms step up dollar demand to cover rising fuel import costs.
Central bank officials are said to have opted for the liquidity-tightening route rather than directly selling dollar reserves into the market, with a senior Bank of Uganda official, Adam Mugume, reportedly cautioning that direct intervention through reserve sales could amount to “policy inconsistency” given the bank’s broader monetary stance. By instead compressing the amount of shillings banks have available to lend, the regulator hopes to cool import-driven dollar demand and stabilise the exchange rate without drawing down foreign currency reserves.
The move is expected to have knock-on effects for borrowers, with economists cautioning that reduced liquidity in the banking system could squeeze private-sector credit and push up the cost of loans, including mortgages and business financing, at a time when many Ugandan businesses are already grappling with elevated import costs. Rising fuel prices have been identified as a key driver of the current inflationary pressure, compounding the effect of the weaker currency on the cost of living.
The shilling’s slide mirrors pressure being felt on several currencies across the region as global dollar strength and elevated energy import bills weigh on East African economies. Analysts will be watching closely in coming weeks to see whether the higher reserve requirement succeeds in stabilising the currency, or whether the Bank of Uganda will need to consider further measures, including a review of its benchmark interest rate, should pressure on the shilling persist.