BoU to purchase gold worth Shs574b between March and June 

Bank of Uganda’s new gold purchase programme is emerging as one of the country’s most ambitious monetary policy initiatives in recent years, aimed at strengthening foreign exchange reserves and reducing vulnerability to external shocks.

But while the International Monetary Fund (IMF) acknowledges the programme’s potential, it is cautioning that the strategy must be carefully managed to avoid significant financial and operational risks.

In its assessment of Uganda’s economy, the IMF noted that rebuilding foreign exchange reserves remains critical to safeguarding macroeconomic stability.

Although reserves rose sharply in 2025, reaching about 3.1 months of import cover by October, they remain slightly below the IMF’s recommended adequacy range of 3.5 to 4.5 months for credit-constrained economies.

To accelerate reserve accumulation, Bank of Uganda launched a Domestic Gold Purchase Programme last year to buy gold in shillings from licensed local miners and add refined gold to its foreign reserves.

A strategic shift

According to the IMF, the pilot gold purchase programme offers potential to support foreign exchange reserves buildup but must be carefully managed to mitigate financial and operational risks.

Under the three-year pilot, the central bank will purchase locally mined gold with a minimum purity threshold, refine it to international monetary standards, and store it as part of Uganda’s reserve assets.

The programme is also designed to formalise artisanal gold mining by strengthening compliance, traceability, and certification systems.

It also reduces reliance on foreign exchange markets at a time when global financial conditions remain volatile.

Why reserves matter

Uganda’s external position has improved over the past year, supported by strong coffee exports and renewed portfolio inflows.

However, the IMF warns that the country remains exposed to risks including commodity price shocks, capital outflows, oil project delays, and governance weaknesses.

Covid-19 related expenditures forced Bank of Uganda to draw from the country’s reserves, which at some point cut the country’s import cover to under three months.

But the reserves have since recovered to pre-Covid-19 levels.

Risks beneath the surface

Despite its strategic rationale, the gold programme is not without challenges.

The IMF highlights concerns about gold price volatility, which could affect the valuation of reserves.

There are also liquidity constraints, since gold is less liquid than major reserve currencies and cannot be deployed as quickly during market stress. Storage and security considerations pose additional operational challenges.

Beyond financial risks, the programme requires strict traceability and know-your-customer safeguards to prevent illicit flows and reputational damage.

The IMF also cautions that a poorly structured pricing framework could create quasi-fiscal losses if refining, transport, and security costs are not fully recovered.

Managing IMF concerns

In response to the risks, Bank of Uganda indicated that it was putting in place operational frameworks to manage these concerns, including enhanced due diligence processes and risk mitigation mechanisms.

The gold initiative is unfolding against a backdrop of rising fiscal pressures. Uganda’s public debt reached 52.4 percent of GDP in the 2024/25 financial year, and interest payments are consuming an increasing share of domestic revenues.

While growth remains robust at 6.3 percent in the 2024/25 financial year, fiscal consolidation remains a priority.

Thus, strengthening foreign exchange buffers seeks to preserve investor confidence, maintain exchange rate stability, and ensure that Uganda meets its external obligations even under stress.

Globally, several central banks, particularly in emerging and developing economies, have increased gold holdings as part of diversification strategies amid geopolitical tensions and currency volatility.

Uganda’s move places it within that broader trend. Whether the programme proves transformative will depend less on the act of buying gold and more on how openly and transparently it is managed.

IMF says that whereas gold can help strengthen Uganda’s financial defences, it can only be achieved if strong safeguards are firmly in place.

Foreign investors hold significant share of govt domestic debt

Meanwhile, financial experts have revealed that foreign investors hold significant amounts of Uganda’s government domestic held in bonds, exceeding $2bn by 2025.

The development presents both opportunities and risks for the Bank of Uganda. While investors looking for stable investment flows provide much needed foreign currency inflows, they also expose the country to risks such as currency volatility, high debt servicing costs, and the possibility of sudden capital flight.

Currency volatility stands out as one of the biggest challenges, with experts noting that a sudden and large scale repatriation of funds by foreign investors, through selling bonds and converting proceeds into dollars, could trigger a rapid depreciation in the shilling.

There is also foreign exchange pressure, where if there are high levels of foreign-held debt income in dollars during bond redemptions, which could potentially strain the country’s foreign exchange reserves.

Another risk involves rising debt servicing costs. To attract foreign investors, government must offer relatively high interest rates, which increases the debt burden and ultimately places additional pressure on the central bank.

Additionally, there are monetary policy limitations that may compel Bank of Uganda to maintain high interest rates to retain foreign investors. However, elevated interest rates suppress domestic investment and slow economic growth.

Attractive returns

Uganda has experienced strong foreign participation in government bonds, largely driven by attractive returns.

Foreign investors are required to meet a minimum investment threshold of $2,000,000 for investing.

Although foreign exchange reserves have been volatile, they rose to over $6bn in late 2025.

Jibran Qureshi, Stanbic Bank head of Africa economic research, said during a Stanbic Bank programme architecture that Bank of Uganda must strike a crucial balance between foreign investment and managing the risks associated with capital flow volatility.

“Foreign investors holding $2bn in the central bank is a significant risk because if they exit suddenly, it would pose a major threat to the country’s foreign exchange reserves,” he said, noting that government should establish buffers to strengthen the country’s foreign exchange reserves.

However, Bank of Uganda governor Augustus Nuwagaba said the central bank was establishing its gold purchases to boost reserves.

“We are buying whatever gold is brought to us by Ugandans, starting from as little as one gramme to improve the country’s reserves,” he said.