Bank of Uganda Governor Michael Atingi-Ego has dismissed suggestions that Uganda’s Protection of Sovereignty Act, 2026, contributed to the recent depreciation of the shilling, pointing instead to a widening external payments deficit and slower portfolio investment inflows.
The law, signed by President Yoweri Museveni in May after Parliament revised some of its controversial provisions, regulates individuals and organisations acting in the interests of foreign entities, including aspects of their foreign funding.
The legislation had raised concerns about its possible implications for foreign investment, remittances and other cross-border financial flows.
At a press conference on Wednesday, journalists questioned whether uncertainty surrounding the law could have contributed to capital outflows, amid reports that more than US$200 million had reportedly left Uganda in the preceding two weeks.
Atingi-Ego did not directly confirm the reported outflow. Instead, he attributed the shilling’s weakness mainly to deteriorating external account balances and a moderation in portfolio investment flows.
“This does not in any way explain what the Sovereignty Bill did. This explains the deterioration in the current account balance, explaining the depreciation in the currency,” he said.
The governor was speaking after the central bank raised its Central Bank Rate (CBR) by 2.25 percentage points, from 9.75 per cent to 12 per cent, in a move aimed at containing inflationary pressures and limiting further depreciation of the shilling.
According to figures presented by the governor, Uganda’s goods trade deficit widened to US$2.8 billion from US$2.4 billion, while the services deficit increased to US$3.3 billion from US$2.2 billion in the 12 months to August 2026.
He partly attributed the deterioration in services to losses in tourism associated with Ebola-related concerns.
The primary income deficit, which includes interest payments on government debt and other income payments to non-residents, also expanded to US$1.7 billion from US$1.4 billion over the period.
These developments, he said, had increased pressure on the country’s external payments position, contributing to the depreciation of the local currency.
Atingi-Ego added that slower portfolio investment inflows had further weighed on the shilling. Portfolio investments include financial assets such as government securities and shares, which investors can buy and sell without necessarily establishing long-term business operations.
However, the governor’s explanation did not establish whether concerns about the regulatory environment had influenced investment decisions or contributed to changes in capital flows.
He noted that secondary income, which includes remittances and other transfers, had risen to US$3.1 billion from US$2.7 billion, providing additional foreign exchange inflows.
He maintained that the currency’s depreciation was “purely a balance of payment matter.”
Central bank defends rate increase
The decision to raise the benchmark interest rate reflects the central bank’s concern that inflationary pressures could spread across the economy if left unchecked.
Atingi-Ego acknowledged that tighter monetary policy could increase borrowing costs and slow economic activity. However, he argued that allowing inflation expectations to become entrenched would impose greater costs on the economy over the medium and long term.
Dr Adam Mugume, the Bank of Uganda’s Executive Director for Research and Policy, said the central bank expected core inflation to rise towards 5.5 to 6 per cent, creating a risk that price increases could spread across a wider range of goods and services.
Mugume said the decision involved balancing the need to contain inflation against the risk of weakening economic growth.
He warned that tighter monetary conditions could reduce private-sector access to credit, push interest rates higher and lower economic growth by at least half a percentage point.
However, he argued that higher interest rates could help reduce demand for imports while making Ugandan financial assets more attractive to investors, potentially easing pressure on the exchange rate.
“The benefits outweigh the costs that will come in terms of slightly lower economic growth,” Mugume said.
Atingi-Ego said the central bank had to act before inflation and exchange-rate expectations became firmly established among businesses and households.
“It might result into reduced growth, higher loan repayments, particularly if your loan is on a variable rate. But it is better to rein in these variables before they become entrenched, so as to preserve the medium- and long-term stability of the economy,” he said.
The rate increase could nevertheless create additional challenges for businesses and households already grappling with higher import costs and a weaker shilling.
As commercial banks adjust their lending rates in response to tighter monetary policy, borrowers could face more expensive credit, potentially affecting investment, consumption and business expansion.
Debt sustainability under scrutiny
The governor also addressed concerns about Uganda’s public debt and the effect of the shilling’s depreciation on the cost of servicing external obligations.
Asked whether the rising cost of debt repayment could constrain government spending on development programmes and essential services, Atingi-Ego said an updated debt sustainability analysis incorporating the latest exchange-rate movements had not yet been completed.
He explained that debt sustainability assessments consider different economic scenarios, including currency shocks, to establish whether key debt indicators could exceed acceptable thresholds.
“While we have not yet done the most recent analysis based on this currency, I would want to assure you that the indicators suggest that Uganda’s debt is sustainable,” he said.
He added that, as of August, there had been no indication that the country’s debt had become unsustainable.
A weaker shilling generally increases the amount of local currency required to repay external debt denominated in US dollars and other foreign currencies. The extent of the impact depends on the composition of the debt, the timing of repayments and the scale of exchange-rate movements.
The updated assessment is therefore expected to provide a clearer picture of how the recent depreciation could affect Uganda’s debt position.
Supply-side pressures and growth concerns
Atingi-Ego also defended the interest rate increase against concerns that the inflationary pressures facing Uganda largely originate from supply-side factors, including rising international oil prices and higher food costs.
Such pressures present a challenge for policymakers because higher interest rates cannot directly reduce the international prices of fuel, imported food or shipping services.
However, the central bank argues that monetary tightening can limit the extent to which initial price increases spread through transport, production, distribution and other domestic costs.
Responding to concerns that higher borrowing costs could undermine the government’s Tenfold Growth Strategy, Atingi-Ego referred to the economic disruptions that followed Russia’s invasion of Ukraine in 2022.
He said the central bank initially monitored the impact of rising fuel prices before tightening monetary policy as the increases began spreading to other consumer prices.
He argued that a central bank should intervene when a supply-side shock begins generating broader and sustained inflationary pressures.
“So, you’re right, it’s supply-side, but we act when it begins to feed into the broader CPI,” he said.
The policy presents a challenge for the government, whose growth ambitions depend on expanding production, attracting investment and increasing economic activity. Higher interest rates could make financing these activities more expensive, potentially slowing private-sector investment.
The Bank of Uganda, however, maintains that controlling inflation and limiting exchange-rate volatility are essential to preserving macroeconomic stability and creating conditions for sustainable economic growth.
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