Uganda takes drastic cash squeeze as Middle East conflict hikes fuel prices

Uganda’s central bank has moved aggressively to drain cash from the banking system as rising fuel prices and mounting pressure on the shilling expose the country’s growing vulnerability to the escalating conflict in the Middle East.

• Uganda’s central bank has raised the Cash Reserve Ratio to 11% as pressure mounts on the shilling and fuel prices surge.
• The move is aimed at reducing liquidity, curbing forex speculation and limiting imported inflation linked to the US-Iran-Israel conflict.
• Fuel prices across Uganda have climbed sharply as disruptions in global oil markets and shipping routes increase import costs.
• Analysts warn that limited foreign currency reserves are constraining Uganda’s ability to defend its currency through direct market intervention.

The Bank of Uganda (BoU) this month raised the Cash Reserve Ratio (CRR), the portion of customer deposits commercial banks must keep with the central bank, from 9.5 percent to 11 percent in one of its strongest liquidity tightening measures in recent years.

The move comes as the ongoing US-Iran-Israel conflict disrupts global oil markets, pushes up shipping costs and delays cargo movements through the strategically critical Strait of Hormuz, a major global energy transit route.

For many Ugandans, the effects are already visible at petrol stations.

Fuel prices in Kampala have climbed to between Ush5,000 ($1.3) and Ush6,000 ($1.6) per litre, while some towns outside the capital are reportedly recording prices as high as Ush10,000 ($2.6) per litre, according to local market sources.

Uganda's currency crashes over dollar demand

The sharp increase in import costs has intensified demand for US dollars, weakened the Ugandan shilling, and raised fears of imported inflation, even as the country’s foreign exchange reserves remain under pressure.

A higher CRR forces banks to hold more reserves with the central bank, reducing the amount available for lending, investment, and currency speculation.

Banking sector sources estimate the latest adjustment could remove roughly Ush4.84 trillion ($1.27 billion) from interbank market liquidity based on existing deposits in the financial system.

Officials and analysts say the strategy aims to prevent a deeper currency crisis without exhausting Uganda’s relatively limited foreign currency reserves through direct forex market interventions.

Uganda’s reserves rose from $5.64 billion in February 2026 to about $6 billion in March, equivalent to four months of import cover. However, this still falls below the East African Community’s convergence target of 4.5 months.

Meanwhile, pressure on the currency has continued to build, with the Ugandan shilling trading at an average of Ush3,562 per US dollar in January, then weakening to Ush3,568 in February and further to Ush3,731 in March, according to BoU figures.

“Cutting liquidity in the banking industry will help bring down risks of speculation and volatility in the foreign currency market,” said Benoni Okwenje, General Manager for Financial Markets Operations at Centenary Bank Uganda Limited.

Weak reserves limit Uganda’s ability to defend its currency

He added that Uganda’s reserve position limits the central bank’s ability to intervene aggressively in currency markets without rapidly depleting dollar holdings.

BoU Executive Director for Supervision, David Kalyango, said the latest CRR increase is primarily intended to stabilise the exchange rate and reduce inflationary risks stemming from external geopolitical shocks.

“The geopolitical risks are piling pressure on our import bill, fuel prices and other foreign-sourced items,” said Charles Katongole, a senior executive at Standard Chartered Bank Uganda Limited.

He warned that failure to contain liquidity and speculation could worsen inflationary pressures across the economy.

The latest measures echo actions taken during the Russia-Ukraine conflict in 2022, when Uganda raised the CRR from eight per cent to 10 per cent as inflation surged above 10 per cent.

That tightening cycle later helped bring inflation back to single digits, allowing the central bank to ease the ratio to 9.5 per cent before the latest Middle East shock triggered fresh concerns.

Now, with global oil markets increasingly volatile and peace negotiations between the US and Iran showing limited progress, Uganda’s central bank appears determined to act early before currency instability spirals into a broader economic crisis.