The effect of foreign exchange rate volatility on Uganda’s exports

Abstract

The study investigated the effect of exchange rate volatility on Uganda’s exports. Time series data obtained from the World Bank’s World Development Indicators database was used. The dependent variable was the logarithm of Uganda’s exports. The independent variables are; exchange rate volatility, GDP, human capital, population and inflation. Eviews 9 data analysis software was used to generate preliminary descriptive statistics, diagnostic test results as well as econometric results. An autoregressive distributed lag model (ARDL) was used for analysis. Two models were estimated to find out the effect of exchange rate volatility on Uganda’s exports. The study found out that on average a 10% change in the exports lagged by one period (-1) holding other factors constant, on average, increases current exports by 4.0% and by 7.0% for the respective models 1 and 2. This means that lagged exports positively and significantly affect the rate of current exports growth. It was further found out that exchange rate volatility negatively affects exports where a 10% change in exchange rate volatility holding other factors constant would on average, negatively and significantly lead exports to reduce by 0.9% The negative and significant coefficient implies that more exchange rate volatility reduces Uganda’s exports. A similar finding was established for the lagged values of exchange rate volatility. The results for the control variables show that a 10% increase in GDP positively and significantly increases exports by 9% holding other factors constant. Inflation on the other hand has a positive influence on exports as more of it reduces the value of the domestic currency against foreign currencies rendering domestic goods cheaper had hence encourages exports. The log of human capital for models one and two show mixed results with negative effects for current human capital and positive relationship between human capital and exports for the lagged values. Regarding the effect of total population on exports, the findings show that for current population the effect is negative although insignificant. The study recommends that the government of Uganda through its financial and economic policy planning organs such as the Ministry of Finance and Economic Development and Bank of Uganda should utilize policy measures that increase exports through managing exchange rate volatility. Exchange rate and Tax rate should be monitored and reduced and inflation control by vii the bank of Uganda should be an important policy objective to enable a good environment for FDI.