The Effect of Exchange Rate Fluctuations on Uganda’s Export Performance

Abstract

The main objective of this study was to investigate the effect of exchange rate volatility on export trade in Uganda. The data used was annual secondary time series obtained from World Bank website (development indicators) The dependent variable of the study was Export Trade whereas Exchange rate, inflation, Exchange rate Volatility, GDP and investment were the independent variables. Analytically, the study generated an Auto Regressive Distributed Lag Model after testing for unit root using the two tests; Augmented Dickey Fuller (ADF) and Philips Perron (PP) unit root tests. The results from the Auto Regressive Distributed Lag Model did not suffer from the problems of spurious regression, heteroskedasticity and autocorrelation based on the post-estimation tests carried out which included Breusch-Godfrey Serial Correlation LM Test and Durbin Watson Test for serial correlation and Ramsey RESET test for Omitted variables The findings of the study indicate that Exchange rate volatility was found to a significant negative effect on exports in Uganda. It was also found out that though the appreciation of the exchange rate was observed to have a positive effect on export trade which could be attributed to gains accrued by exporters who strive to take advantage of the higher prices offered by the market The implication of these findings is that government of Uganda should invest in hedging facilities and institutions so as to protect the risk averse export traders from the market uncertainties. Furthermore, the government should create incentives such as export subsidies in order to promote export trade