Middle East Conflict Weakens Uganda Shilling, Fuels Inflation Fears

The ongoing conflict in the Middle East is exerting significant pressure on the Uganda Shilling, leading to its depreciation and raising concerns about rising inflation, according to the Bank of Uganda (BoU).

Between February and April, the Shilling weakened by approximately 5.4 percent, largely attributed to global economic uncertainty stemming from the conflict. This depreciation makes essential imports like fuel, medicines, and industrial materials more expensive, which is expected to fuel inflation.

BoU Governor Michael Atingi-Ego cautioned that persistent conflict and elevated global oil prices could lead to broader inflationary pressures, potentially impacting household consumption and slowing economic growth. He also noted that further monetary tightening by advanced economies could strengthen the US dollar, adding more pressure on the Shilling and increasing imported inflation.

While the BoU projects the Ugandan economy to grow around 8 percent over the medium term, supported by exports and investment, the balance of risks remains tilted downwards. Factors such as geopolitical tensions, high energy prices, geoeconomic fragmentation, and adverse weather conditions pose significant threats. The recent rise in headline inflation to 3 percent in April, driven by energy and utility costs, reflects these emerging challenges.

Despite these headwinds, the Monetary Policy Committee has decided to maintain the Central Bank Rate at 9.75 percent while closely monitoring global developments and inflation risks. The bank anticipates core inflation to rise moderately in the latter half of 2026 before stabilizing around its medium-term target by 2027. Positive factors like improved weather conditions or a faster resolution of geopolitical conflicts could help ease inflationary pressures and support economic growth.

This article is based on information from the Daily Monitor.