Macro

Uganda Eyes Gold Purchases to Bolster $3.47B Reserves Amid Capital Outflows

Uganda to Buy Domestic Gold to Bolster $3.47 Billion Reserves Amid Economic Pressures

By Athena Xu

7/11, 05:43 EDT
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Key Takeaway

  • Uganda plans to purchase gold domestically to bolster foreign exchange reserves and support local miners, following similar moves by Nigeria and Zimbabwe.
  • Uganda's foreign reserves fell by $149 million to $3.47 billion due to capital outflows, exacerbated by anti-LGBTQ legislation.
  • Despite lacking significant mining operations, Uganda exported $2.8 billion in bullion over the past year, partly from illicitly smuggled Congolese gold.

Uganda's Strategic Gold Purchases

Uganda has announced plans to purchase domestic gold to bolster its foreign exchange reserves and mitigate risks associated with reserve investments. The Bank of Uganda (BOU) will directly buy bullion from artisanal miners, a move that aligns with government efforts to support local mining and reduce raw gold imports. This initiative mirrors similar strategies in other African nations, such as Nigeria's proposal for its central bank to buy all locally produced gold and Zimbabwe's launch of the gold-backed ZiG currency.

The BOU's decision comes as Uganda's foreign exchange reserves have been under pressure, partly due to capital flight following anti-LGBTQ legislation that led the World Bank to halt new financing. Uganda's reserves fell by $149 million to $3.47 billion in the year through April, covering only 3.2 months of future imports, which the central bank deems inadequate for the country's currency account deficit. The BOU currently holds no gold in its reserves.

"The gold purchase program aims at mitigating the declining foreign currency reserves and addressing the associated risks in the international financial markets," the BOU stated. By purchasing gold directly from artisanal miners, the BOU aims to support their livelihoods, with positive spill-over effects on other sectors of the economy.

Regional Gold Strategies

Uganda's move is part of a broader trend among African nations to leverage gold for economic stability. Zimbabwe, for instance, launched the ZiG currency backed by 2.5 tonnes of gold to stabilize its local unit. Ghana, Africa's second-largest gold producer, has mandated that large miners sell 20% of their refined gold to the central bank. These measures are responses to high debt levels and soaring interest rates as countries strive to recover from the economic impacts of the Covid-19 pandemic and the inflationary pressures exacerbated by Russia's invasion of Ukraine.

Uganda, despite faring better than many of its peers due to prompt monetary policy tightening, still faces challenges. The country has gold refineries but lacks significant mining operations. However, Wagagai Mining Uganda Ltd., a unit of China's Liaoning Hongda Enterprises, plans to commission a refinery in 2024 following a significant ore discovery.

Uganda exported $2.8 billion worth of bullion in the 12 months through April, with some of this gold reportedly smuggled from the Democratic Republic of Congo, according to a UN panel of experts. This highlights the complex dynamics of the regional gold trade and the potential for Uganda to formalize and capitalize on these resources.

Global Gold Trends

The trend of increasing gold reserves is not limited to Africa. The Czech Republic expanded its gold holdings to 41.5 metric tons in June, up from 39.7 tons the previous month, as part of central bank Governor Ales Michl's strategy to diversify investments and enhance profitability. Michl aims to boost the bank's gold holdings to 100 metric tons, a tenfold increase from two years ago. This diversification is expected to raise the average annual return on reserves to about 4%, up from a long-term average of 2.6%.

Gold has gained popularity in central and eastern Europe as countries seek to protect their economies from geopolitical turmoil. Serbia's central bank recently purchased 5 tons of gold, increasing its total holdings to 46.5 tons. President Aleksandar Vucic emphasized the importance of financial security in uncertain times, stating, "We want to be safe and secure in hard times, which I expect as the president of the republic."

Management Quotes

  • Bank of Uganda:

    "The gold purchase program aims at mitigating the declining foreign currency reserves and address the associated risks in the international financial markets. 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."