Exchange rate and trade balance in Uganda (1975-2015)
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Date
2019-04
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Publisher
Kampala International University, College of Economics & management.
Abstract
This study examines the relationship of Exchange Rate changes and trade balances in Uganda for the period 1975 to 2O15~ Uganda needs to strengthen the capacity of firms to improve on the quality of products so that the government does not have to import almost everything especially during construction of big projects. The objectives of the study were; i) to examine the long run relationship between exchange rates and trade balance in Uganda, ii) to assess the short run relationship between exchange rates and trade balance in Uganda. To avoid spurious regression problems, the data were tested for stationarity and Cointegration. Augmented Dick -Fuller (ADF) tests show that the series were non-stationary at Level but all of them are stationary at their first difference. The Engle granger Cointegration Test shows that there are long and short run relationship between exchange rate and trade balance in Uganda. The findings of the study were; The test for stationarity using Augmented Dickey-Fuller (ADF) test proved that the variables used in this study are stationary, though not in levels, but in their first differences. The next step involved test for cointegration using the Engle granger Cointegration approach which proved the existence of cointegration. Under such circumstances, we employed the error correction model (ECM), since it offers more and better information compared to other data generation processes. The results point to a close long-term effects of exchange rate and trade balance. The recommendations were; monetary policy management should emphasize price stability and minimization of volatility in interest rates and exchange rates of the shillings, and from what has been observed from the study that exchange rates can have an impact on the country’s external trade balance, exchange rates could be used as a tool to reduce the country’s external imbalances. The contribution to the study was that; the study indicated that when the international exchange rate falls, the local currency in relation to world currencies appreciates, imports become cheaper, exports become expensive thus leading to more imports and less exports. On the other hand, when the international exchange rate rises, the local currency in relation to world currencies depreciates, imports become more expensive, exports become cheaper and the country exports more and imports less. From this deduction, it is noted that foreign exchange rate movements affect international prices both negatively and positively leading to either a decline or boost in trade.
Description
A research thesis submitted to the College of Economics and Management in partial fulfillment of the requirements for the Award of Master’s Degree of Economic Policy and Planning of Kampala International University
Keywords
Exchange rate, Trade Balance