The Effects of Real Exchange Rate Volatility on Uganda’s Export Earnings

Abstract

Since the adoption of floating exchange rate regime in the early 1990’s, Uganda shilling has continued to fluctuate especially against the US dollar. Literature postulate that Exchange rate volatility affects the country’s exports either positively or negatively. However in Uganda, it’s not clear which effect volatility has had on export earnings. Against this ground, the major objective of this study was to determine the effect of exchange rate volatility on export earnings in Uganda. The study employed secondary data for the period 2000q1 to 2016q4. While using ARDL estimation technique, the study found that real exchange rate volatility has a negative effect on export earnings suggesting that increase in exchange rate volatility makes risk averse traders to prefer domestic market than foreign market. Other variables found to have a significant impact on export earnings in Uganda include relative price of exportable commodities (negative impact) and terms of trade (positive impact). Based on the findings the study recommends measures to stabilize exchange rate, measures to improve terms of trade for example through purchase contracts, and measures to increase international competitiveness of the country’s exports through value addition.