Effect of Exchange Rates on the Value of Motor Vehicle Imports in Uganda (2000–2015)

Abstract

The study aimed at investigating the effect of exchange rates on the value of motor vehicle imports in Uganda using quarterly data for the period 2000 to 2015. To confirm that variables were stationary, unit root test was carried out using the Augmented Dickey Fuller test (ADF). The test showed that all variables, that is, value of motor vehicle imports, exchange rates, money supply, lending rates, government expenditure on transport & equipment and household loans were non stationary at level but became stationary after first difference. Ordinary least squares estimation method was used to fit both the short and long run models. To determine the direction of relationship, Engle and Granger causality test was applied to the variables indicating that exchange rates granger cause motor vehicle imports with a p-value of 0.04, significant at 5 percent. The results from the long run model showed that an increase in exchange rate negatively affects the value of motor vehicle imports in Uganda with a p-value of 0.014 significant at 5 percent. Money supply and household loans positively affect the value of motor vehicle imports with pvalues of 0.000 and 0.013 respectively, significant at 5 percent. Results from the short-run model indicated that the Error Correction Term was negatively signed indicating that in each quarter, motor vehicle imports adjust by 73.1 percent between the current and long run equilibrium level with a p-value of 0.000, significant at 5 percent. It is recommended that motor vehicle importers embrace an increase in the stock of money with an increase in motor vehicle imports in Uganda. Furthermore, a depreciation in the value of the Uganda shilling should be an alarm to the car importers to reduce on motor vehicle imports into Uganda because an increase in exchange rate negatively effects the car business. Lastly, to have a more stable business environment in Uganda, there is need for Bank of Uganda to further stabilise the value of the Uganda shilling against the US dollar because a depreciation makes imports more expensive resulting into reduced imports and ultimately a reduction in import duties collected by Uganda Revenue Authority.