Seizing the Fiscal Window: How a Weakening US Dollar is Reshaping East Africa’s Economic Horizon

For the better part of the last decade, the global economic narrative has been dominated by a singular, suffocating protagonist: the 'King Dollar'. Its reign has been absolute, exporting inflation to the Global South with ruthless efficiency and crushing emerging market currencies under its boot. For East African treasuries, this period was akin to financial asphyxiation – borrowing costs soared, import bills ballooned, and debt servicing consumed revenue that should have built hospitals and roads.

But 2025 brought a tectonic shift. The greenback is retreating.

Driven by a cooling US economy and a dovish pivot in American monetary policy, the dollar’s rally has run out of steam. This stands in stark contrast to the volatility of 2023, where East African currencies touched historic lows, leaving central bankers scrambling to defend their reserves. Today, the storm has broken, and the region is breathing easier. Yet, as the tide turns, it reveals a landscape that is both promising and perilous. While a weaker dollar offers a critical lifeline for debt servicing and taming inflation, it presents a new, nuanced paradox: protecting export competitiveness in a strengthening local currency environment.

The Debt Reprieve

For East African sovereigns, the dollar’s retreat is not merely a statistical adjustment; it is the removal of a fiscal albatross. The most immediate and profound impact is the reduction in the cost of servicing dollar-denominated debt – a burden that had threatened to derail development agendas from Nairobi to Kampala.

Kenya serves as the prime example of this turnaround. For years, the country’s external debt stock seemed to grow simply by waking up in the morning, as a sliding shilling inflated the value of dollar loans. The reversal of this trend has been dramatic. The strengthening of the Kenya Shilling – trading steadily around 129 to the dollar – has effectively shaved billions off the national debt stock in local currency terms without a single shilling of principal being repaid. This "paper gain" translates into real-world fiscal space, allowing the Treasury to pivot from crisis management to strategic investment.

This newfound stability is mirrored across the East African Community, though the drivers differ. In Uganda, the Shilling recorded a 3.2% appreciation year-on-year, buoyed not just by global trends but by a surge in investor confidence. This resilience was a key factor in S&P Global Ratings revising Uganda's outlook to positive, a rare accolade in a continent often viewed through a lens of risk. The agency cited stronger growth prospects and a stabilizing external position as the economy gears up for oil production.

Meanwhile, Tanzania has leveraged this period of reduced currency volatility to manage its external obligations with greater predictability. While the Tanzania Shilling has seen some depreciation, the pace has slowed significantly compared to the erratic swings of previous years, allowing the Bank of Tanzania to accumulate reserves rather than burning them to defend a peg.

This regional reprieve is not a license to borrow recklessly. Rather, it is a window of opportunity to restructure existing liabilities under more favourable terms. It allows governments to build buffers against future shocks, ensuring that when the currency cycle inevitably turns again, East Africa is not caught swimming naked.

Taming the Cost of Living

The benefits of a retreating dollar trickle down from the high towers of finance to the wananchi through the import bill. East Africa remains a net importer of key industrial inputs – fuel, fertiliser, and heavy machinery – all priced in dollars. When the greenback weakens, the landed cost of these commodities falls at the port of Mombasa or Dar es Salaam.

This transmission mechanism acts as a natural brake on inflation. Fuel, being a universal input, dictates the cost of everything from a matatu ride to a loaf of bread. A stronger local currency acts as a shield against imported price pressures. This reduction is already evident in the region’s consumer price indices. Uganda’s inflation dropped to 3.4% in late 2025, a figure that signals price stability has returned. Kenya tells a similar story, where inflation stood at 3.3%, firmly within the government’s preferred target range.

While the drop in prices at the duka may not be immediate due to supply chain lags – a phenomenon economists call 'price stickiness' – the trajectory is undeniably positive. Lower import costs mean farmers can access cheaper fertiliser, leading to better harvests and lower food prices, further dampening the cost of living.

This moderation in prices has given central bankers across the bloc the confidence to pivot from tightening to easing. The Bank of Tanzania recently cut its policy rate to 5.75%, while Kenya lowered its benchmark to 10.75%. These coordinated moves are significant; they signal a regional shift from fighting fire to fueling growth. Cheaper credit, combined with lower input costs, should theoretically spur private sector activity. Businesses that were previously stifled by the twin chokehold of high interest rates and expensive forex can now plan with greater certainty, investing in expansion rather than just survival.

The Exporter’s Dilemma

Yet, the coin has a flip side. A stronger local currency is a double-edged sword for East Africa’s export-oriented sectors. While importers toast the stronger shilling, exporters face what economists call 'Dutch Disease' risks. When the local currency strengthens, earnings denominated in dollars translate to fewer shillings back home.

This dynamic is particularly acute for the agricultural sector, the backbone of the region’s economy. Uganda’s coffee sector is currently navigating this delicate balance. The country has seen a massive boom in volumes, earning a record $2.2 billion. However, for the exporter paying farmers, transporters, and processors in a strengthening Ugandan Shilling, margins are being squeezed. The buffer provided by high global coffee prices is currently masking this pain, but should global commodity prices soften, the currency drag will be felt more acutely.

Tourism, another critical forex earner, faces a similar competitiveness challenge. A stronger Kenyan or Tanzanian Shilling makes an East African safari more expensive for a tourist paying in Euros or Pounds, especially if competing destinations like South Africa see their currencies weaken. The industry must therefore compete on value and experience rather than just price.

Tanzania, however, benefits from a unique hedge. While its manufacturing and agricultural exporters feel the pinch, the mining sector is thriving. Global gold prices shattering $4,000 per ounce act as a massive counterweight. Even if the shilling strengthens, the sheer value of gold exports ensures that revenue in local currency terms remains robust. This commodity cushion allows Tanzania slightly more room to maneuver than its neighbours who rely more heavily on soft commodities like tea and flowers.

This dilemma exposes the vulnerability of selling raw commodities. The strategic pivot must be towards value addition. A raw coffee bean sold in dollars is at the mercy of the exchange rate. A packaged, branded coffee product sold regionally or internationally commands a higher price and higher margin, making it less sensitive to marginal shifts in currency value. Building this industrial capacity is the only long-term hedge against the whims of the forex market.

Conclusion

The weakening dollar is a window of opportunity, not a permanent victory. Currency markets are cyclical; the greenback will eventually rally again, and the tides of global finance will shift once more. East Africa is emerging from the currency storm more resilient, but we must use this calm to build internal capacity rather than just enjoying the cheaper imports.

The true solution lies in reducing the region's structural reliance on the dollar altogether. Governments must accelerate the adoption of intra-EAC trade settlements in local currencies. The Pan-African Payment and Settlement System (PAPSS) offers a glimpse into a future where a Kenyan manufacturer can pay a Ugandan supplier in Kenya Shillings, and the supplier receives Uganda Shillings, bypassing the dollar entirely. This would insulate regional trade from offshore volatility and deepen economic integration.

Simultaneously, the private sector must invest in processing capacity to insulate export earnings. We must fix the roof while the sun is shining. The dollar’s retreat has bought us time; it is up to us to use it wisely.