Determinants of Uganda’s balance of payment position; the monetary approach

Abstract

Generally, developing and emerging economies experience balance of payments deficits. A number of factors affect a country’s balance of payments position have been theoretically and empirically investigated in the literature of developing countries. The studies specific to Uganda on the determinants of balance of payments position using monetary approach are nonetheless scanty or are non-existing. This study applied the monetary approach to examine the determinants of Uganda’s balance of payments position using annual time series data collected from the World Development Indicators of the World Bank from 1983 to 2020. The study conducted the Augmented Dickey Fuller and Phillips Perron tests to detect the stationarity properties of variables and employed the ARDL bounds testing approach to cointegration to identify the presence of level, short run and long run relationship among the study variables. The ADF and the Phillips Perron (PP) unit root tests confirmed that variables are integrated of order zero and order one which confirmed the use of ARDL bounds testing approach to cointegration. The bounds test results reported no evidence of a level relationship among the study variables while the ARDL model revealed the presence of short and long run relationship between Uganda’s balance of payments position and the regressors. Specifically, the results demonstrated that domestic credit, real effective exchange rate, inflation rate, real interest rate and trade openness are the long run determinants of Uganda’s balance of payments position while inflation rate is the short run determinant of Uganda’s balance of payment position. Thus, the study concludes that monetary approach to balance of payments is applicable to Uganda. Following the empirical findings, this study recommends policies that are fastened towards ensuring a stable balance of payments position. In particular, policies supporting export promotion strategies and providing short, medium and long term credit to productive investments which are deemed to fetch high foreign exchange earnings and thus offsetting the country’s balance of payments disequilibrium. Key Words: Uganda; Balance of Payments; ARDL; ADF; PP