Factors influencing Uganda's export-import ratio: Implications for the trade balance

Abstract

Uganda has continued to have a trade deficit since 1980 implying that its annual export-import ratios over time have been less than unity despite several reforms undertaken. This study therefore examined the factors influencing Uganda's export-import ratio and derived its implications for her trade balance. In order to carry out this, the study mainly used secondary data obtained from World Bank green data book for a period 1975 to 2011.

The study estimated the error correction model to examine the determinants of export-import ratio. ADF tests of stationary, cointegration tests, and estimation techniques were used in the analysis. Three approaches were examined, that is, elasticity’s approach that puts emphasis on exchange rate as a major determinant of export-import ratio, monetary approach which recognizes changes in money supply and absorption approach which emphases domestic income as a major determinant of export-import ratio. The view of the monetary approach, the currency reform dummy variable were used in the study.

Uganda's export-import ratio is mainly determined by real effective exchange rate, aggregate foreign income, government expenditure, money supply as a proportion of gross domestic product, and domestic income. Domestic income positively influences Uganda's export-import ratio and improves the trade balance while government expenditure contrary had a negative impact in both the short-run and long-run. Real effective exchange rate and aggregate foreign income worsens the export-import ratio in the short-run but eventually improves the trade balance overtime. Money supply as a proportion of gross domestic product only improves the trade balance in the long-run and the currency reform worsened the export-import ratio in the long-run. Uganda's case-study strongly supports the elasticity, the income (Keynesian), and the monetary approaches in the export-import ratio determination.