Uganda’s central bank raised its Cash Reserve Ratio (CRR) from 9.5 percent to 11 percent this month in a drastic move meant to control volatile movements in the foreign currency market and tame rising import bills coupled with thinning narrow windows for both businesses and households in the short-term.

Recent spikes in import bills attributed to ongoing US-Iran-Israeli conflict that broke out in February this year, have led to rising fuel prices across the world, occasional scarcity of petroleum products reported in some countries and delayed shipments of goods ferried through the Strait of Hormuz.

As a result, fuel prices in Uganda have risen to an average of Ush5, 000($1.3)-Ush6, 000($1.6) within Kampala City while some upcountry towns have recorded fuel prices in the range of Ush8, 000($2)-Ush10, 000($2.6) per litre according to local sources. Lingering uncertainty surrounding peace talks between the US and Iran through Pakistani mediation has apparently complicated matters for many central banks.

A higher CRR implies more cash put aside, less funds available for lending to clients within the banking industry and reduced cash at hand for investment in alternative assets such as derivatives.

Faced with significant imported inflation risks arising from the ongoing Middle East conflict, sudden pressures piled against the exchange rate and limited financial muscle available for direct interventions in the forex market, the country’s central bank felt compelled to utilise the CRR tool - a monetary policy device that offers lower intervention expenses in the currency market compared to regular market actions which cost millions of dollars per year.

For instance, previous adjustments made in the CRR helped tame imported inflation pressures triggered by the Russia-Ukraine military conflict that has persisted for more than four years.

In 2022, Bank of Uganda (BoU) raised the CRR from eight percent to 10 percent under surging inflation levels that clocked more than 10 percent between February and June 2022 according to government data. Consequently, inflation levels dropped to single digits in 2023- a development that convinced BoU to slash the CRR to 9.5 percent.

An increase in the CRR from 9.5 percent to 11 percent is likely to cut interbank market liquidity by Ush4.84 trillion ($1.27 billion) based on existing customer deposits held by the banking industry, sources indicated.

Uganda’s foreign currency reserves rose from $5,636 billion, equivalent to 3.7 months of imports in February 2026 to 6,007.6 billion, equivalent to four months of imports in March 2026. These numbers fall short of the East African Community (EAC) monetary union convergence target of 4.5 months of imports.

The Uganda shilling traded at an average of Ush3, 562 against the US dollar in January 2026 but depreciated to Ush3, 568 against the greenbuck in February 2026, BoU figures show.

The Uganda shilling depreciated further against the US dollar in March 2026, posting an average exchange rate of Ush3,731 against the greenback.“BoU communicated the increase in the CRR earlier in March this year, but this communication was previously restricted to commercial banks. The CRR increase is meant to contain inflation pressures that are generated by external factors which feed into import bills, trigger higher product prices and bigger demand for US dollars.“This leads to more pressure piled on the exchange rate and sharp depreciation of the Uganda shilling. Cutting liquidity in the banking industry will help bring down risks of speculation and volatility in the foreign currency market. Uganda’s foreign currency reserves are quite low and this makes it difficult for BoU to intervene aggressively in the forex market without bleeding lots of dollars.“ I don’t see signs of capital flight happening in the local forex market at this time,” argued Benoni Okwenje, General Manager for Financial Markets Operations at Centenary Bank Uganda Limited.“The latest increase in the CRR is meant to cut liquidity levels in the financial markets and protect the exchange rate. Slashing liquidity helps minimise speculation and bring down costs of intervention in the forex market. We expect the exchange rate to stabilise in the near future,” said David Kalyango, BoU’s Executive Director for Supervision.

“The current account position is the biggest target of this increase in the CRR. The geopolitical risks are piling pressure on our import bill, fuel prices and other foreign sourced items and reluctance to deal with this challenge might cause huge spikes in our inflation levels.“BoU is quite constrained by the foreign currency reserves and is unable to intervene in the forex market aggressively through selling lots of dollars at short notice. Slashing liquidity in the banking sector helps to minimise chances of speculation in the foreign currency market at a lower cost compared to direct currency intervention moves,” observed Charles Katongole, a senior executive at Standard Chartered Bank Uganda Limited.

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