Effect of exchange rate volatility on Uganda’s trade performance (1989–2024)

Abstract

This study examines the effect of exchange rate volatility on Uganda’s trade performance from 1989 to 2024, a period marked by persistent trade deficits and significant currency fluctuations. Employing an Autoregressive Distributed Lag (ARDL) bounds testing approach, the research analyzes the long-run and short-run relationships between exchange rate volatility measured using a GARCH model and the trade balance, while controlling for real GDP, foreign direct investment, gross capital formation, inflation, and the real interest rate. The findings show that exchange rate volatility exerts a significant negative long-run impact on Uganda’s trade balance, pointing out the trade-dampening effect of currency changes. Real GDP growth improves the trade balance in the long run, whereas gross capital formation and FDI inflows are associated with a worsening trade position, likely due to their import-intensive nature. The error correction term confirms a swift adjustment to long-run equilibrium. The study concludes that stabilizing the exchange rate, diversifying exports, and coordinating macroeconomic policies are essential for enhancing Uganda’s trade competitiveness and external sector resilience. Keywords: Exchange rate volatility, Trade performance, Uganda, ARDL bounds testing, GARCH model.