The impact of real exchange rate volatility on economic growth: Evidence from Uganda

Abstract

The study examined the impact of real effective exchange rate volatility on economic growth in Uganda. Since the adoption of the floating exchange rate system, where market forces determine the value of the shilling in relation to other foreign currencies. The Uganda shilling has fluctuated against major currencies especially the dollar and this has had implications on the country's economic growth. Thus, real exchange rate volatility has become a concern of many developing countries Uganda inclusive since it affects economic growth but evidence available is not conclusive hence Uganda as an open small economy presents a suitable case for studying the impact exchange rate volatilities on economic growth. The study used secondary quarterly time series data for the period of 1993Q1 to 2015Q4 from World Development Indicator. The Johansen co integration and vector error correction model was used to determine the impact real exchange rate volatility on economic growth in Uganda. The explanatory variables in this study were real exchange rate volatility, government expenditure, labor, exports and imports. Results from the study revealed that real effective exchange rate volatility, labor, government expenditure and exports were found to be statistically significant in explaining economic growth of Uganda in the long run with all having positive relationship. However imports were found to have a negative relationship with economic growth in the long run. In the short run real effective exchange rate volatility and imports had negative relationship with economic growth. From the regression results study recommends that in order to spur economic growth the government should introduce import substitution both in the short run and long run. The government should also intervene in foreign exchange market only in the short run. The government should take significant steps to increase the standard of exported goods to make smooth balance of trade. There should be an increase in government expenditure in human capital because this will spur economic growth in the long run.