KAMPALA
The Bank of Uganda increased the cash reserve requirement for commercial banks to 13.5 percent from 11.0 percent, effective Sept. 24, marking a 250 basis point tightening aimed at defending the shilling without depleting foreign reserves.
The Ugandan shilling traded near 3,925 per dollar, approaching a two-year low, as manufacturers and energy companies stepped up dollar demand to cover rising fuel import costs. The currency has depreciated roughly 6 percent.
Bank of Uganda official Adam Mugume said direct dollar sales to support the shilling would constitute "policy inconsistency." The central bank instead opted to tighten domestic money conditions—a blunter but reserve-preserving tool.
The higher reserve requirement removes shillings from the lending market. Banks must park a larger share of deposits at the central bank, reducing credit available for mortgages, working-capital lines, and overdrafts. The mechanics are straightforward: less liquidity in the banking system forces up funding costs for borrowers and narrows loan availability.
Commercial banks are likely to tighten underwriting standards and reprice credit. Households and small businesses dependent on short-term financing face the most immediate pressure—a trade-off the central bank appears willing to accept to cool import demand and stabilize the currency.
The policy amounts to monetary tightening through the reserve channel rather than the policy rate. By compressing banking-system liquidity, the Bank of Uganda hopes domestic spending softens enough to reduce dollar demand without the foreign-reserve drain that direct intervention would trigger.
