Uganda is set to begin purchasing domestic gold to bolster its foreign exchange reserves and minimize risks associated with reserve investments.
This move makes Uganda the latest African nation to use the precious metal to support its currency.
The Bank of Uganda announced plans to buy bullion directly from artisanal miners, a strategy that aligns with government efforts to support local miners and reduce raw gold imports.
This initiative mirrors a proposal by Nigerian lawmakers for the nation’s central bank to acquire all locally produced gold to strengthen reserves and combat inflation.
In April, Zimbabwe introduced the ZiG currency, backed by 2.5 tonnes of gold, to stabilize its local unit.
Ghana, Africa’s second-largest gold producer, has also mandated large miners to sell 20% of their refined gold to the central bank.
African countries are grappling with high debt levels and soaring interest rates as they strive to recover from the economic impacts of the Covid-19 pandemic and the inflation surge exacerbated by Russia’s invasion of Ukraine.
Uganda’s economy has performed relatively well compared to its peers, thanks to swift monetary policy actions that kept inflation in check and a strategic decision not to defend the shilling during times of pressure.
However, its foreign exchange reserves have suffered due to capital flight following anti-LGBTQ legislation, which led the World Bank to halt new financing to Uganda in August.
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“The gold purchase program aims at mitigating the declining foreign currency reserves and addressing the associated risks in the international financial markets,” the Bank of Uganda stated in a report on its website.
“By purchasing gold directly from the artisanal miners, the BOU will also be supporting the livelihoods of artisanal and small-scale miners, and this has positive spill-over effects on other sectors of the economy.”
Uganda’s reserves fell by $149 million to $3.47 billion, or 3.2 months of future import cover, in the year through April. The central bank noted that this level is insufficient to cover the country’s currency account deficit.
Currently, the Bank of Uganda does not hold any gold in its reserves.
While Uganda has gold refineries, it lacks significant mining operations. However, Wagagai Mining Uganda Ltd., a subsidiary of China’s Liaoning Hongda Enterprises, plans to open a refinery in 2024 following a substantial ore discovery.
Uganda imports gold from the region and exported bullion worth $2.8 billion in the 12 months through April.
A UN panel of experts recently reported that Uganda has benefited from gold smuggled illegally over the border from the Democratic Republic of Congo, a region plagued by years of violent instability.
