Sovereignty Act Not to Blame for Shilling's Fall, Says Bank of Uganda

Governor Michael Atingi-Ego of the Bank of Uganda has firmly stated that the Protection of Sovereignty Act, 2026, is not the cause of the Ugandan shilling’s recent weakening. During a press conference following a significant increase in the Central Bank Rate, Atingi-Ego clarified that the currency’s depreciation is primarily a consequence of Uganda’s deteriorating external balances.

The Act, which regulates foreign-funded activities of individuals and organizations, has faced scrutiny regarding its potential impact on foreign investment. However, Atingi-Ego emphasized that the shilling’s struggles are rooted in economic fundamentals, citing a widening goods trade deficit, an increased services deficit (partially linked to Ebola-related tourism losses), and higher primary income deficits.

While acknowledging a moderation in portfolio investment inflows as a contributing factor, the Governor asserted that the depreciation is “purely a balance of payment matter.” The Bank of Uganda raised the Central Bank Rate by 2.25 percentage points to 12% to combat inflation and currency depreciation, despite potential consequences for borrowing costs and economic activity.

Dr. Adam Mugume, the bank’s executive director for research and policy, elaborated that the policy decision involves a trade-off between inflation control and economic growth. He projected core inflation to rise and warned that tighter monetary conditions could reduce private sector credit and economic growth, but argued that higher interest rates could also attract investors and ease pressure on the exchange rate, making the benefits outweigh the costs.

Atingi-Ego also addressed concerns about public debt, assuring the public that Uganda’s debt remains sustainable, though a full analysis incorporating recent currency movements is pending. He defended the monetary tightening, explaining that while supply-side shocks contribute to inflation, the central bank must act when these shocks begin to fuel broader and sustained price increases across the economy.

Source: https://observer.ug/news/sovereignty-law-not-responsible-for-uganda-shillings-fall-bou