Determinants of trade balance in Uganda, 1988-2007

Abstract

This study set out to examine the determinants of trade balance in Uganda for the period 1988 – 2007 using quarterly secondary data. The hypotheses tested were that; there is a positive relationship between trade balance and real effective exchange rate, foreign direct investment, GDP growth, and terms of trade. Cointegration and error correction techniques were employed, with results indicating that there was a relationship among the variables both in the long run and short run. Econometric results indicate that over the period, GDP growth and foreign direct investment had a positive and statistically significant relationship with trade balance. A ten percent increase in domestic GDP and foreign direct investment will lead to an improvement in trade balance by 5.12 and 0.99 percent respectively. Terms of trade was statistically significant and negative both in the short run and in the long run. A ten percent improvement in terms of trade leads to deterioration in trade balance by 6.03 percent. Based on these findings, it is recommended that government should reduce the price of exports and increase the price of imports. This could be done by reducing export taxes and increasing import taxes, infrastructure improvement, currency devaluation, and reduction of interest rates. Government should aim at achieving high GDP growth rates through improving allocative efficiency, technological improvement, and increase in savings and investments. Government should attract more foreign direct investments by improving investment climate, reducing state interference, improving economic efficiency, and the strengthening of trade liberalization policies.