The stability of the currency over the next couple of years will be largely dependent on the oil industry and the manner in which the elections are held. Currency stability can only be achieved with a stronger balance-of-payments position-either through higher exports and inward transfers or lower import costs. This could be the trend in the medium term. Most significantly, the successful resolution of the tax dispute between the government and a UK-listed company, Tullow Oil, could enable intense investment in the energy sector, drawing in substantial foreign direct investment (FDI) and eventually providing a huge fillip to exports. Furthermore, aid and FDI inflows will increase if the elections pass off relatively peacefully; the political turmoil in Tunisia, which has spread to other countries in the Middle East and Africa, has certainly spooked some investors into investing in less risky assets elsewhere. Likewise, the secession of Southern Sudan could remove political uncertainty, adding to the perceived stability of the region and boosting cross-border trade.

While a stronger currency drives up import costs and causes inflation, it may be a necessary by-product of Uganda's current phase of development. Despite the optimistic export and foreign investment outlook, import costs will continue to grow, taking much of the foreign currency back out of the country and adding to pressure to depreciate. Uganda has been running a structural trade deficit for years; import costs have consistently outweighed export earnings and the difference has generally been covered by aid and investment. This scenario is not uncommon in developing countries that rely on external support, and could even be beneficial if the imports are being used to expand the economy's productive capacity. A good example of this is the high cost of imports needed to build the infrastructure necessary to extract the oil reserves in the Lake Albert region. In the short term this will worsen the trade balance, but over time imports will fall and exports will grow as the oil is extracted. This is an important lesson for the government to bear in mind, as the largest bottleneck preventing faster economic growth is the poor transport and energy infrastructure. Improving this would drive up import costs, which could weaken the exchange rate in the short run but would be to the long-term benefit of the economy.