Effect of exchange rate on foreign direct investments in Uganda (1986-2019)
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Date
2022-09
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Kampala International University, College of economics and management
Abstract
The purpose of the study was to determine the effect of exchange rate fluctuations on foreign direct investments in Uganda (1986-2019). The study objectives were to determine the trend of exchange rate fluctuations and foreign direct investments, then establish the short run relationship between exchange rate fluctuations and foreign direct investments in Uganda (1986-2019) finally to determine the long run relationship between exchange rate fluctuations and foreign direct investments in Uganda (1986-2019). The trend was analyzed using descriptive statistics and trend graphs to show the level of exchange rate fluctuation and foreign direct investments. The data was analyzed using majorly the estimation techniques of ARDL to determine the long run and short run relationship between the variables, the error correction mechanism was used to determine the short run relationship between exchange rate and foreign direct investments. The results show that there has been a general trend of FDI increase from 2000 to 2010 and then increased though at a low rate followed by the decrease in 2019, generally the trend of foreign direct investments is slowing and improving, the rate of the foreign investments in the country has generally increased in the country although at a low rate. The study show that exchange rate value for Uganda during the period of time was generally increasing from 1986, the policy of devaluation led to the increase in the value of the exchange rate, however from 2000s the rate of the exchange in terms of foreign currencies started reducing especially with the United states dollar. The study reveals that there is a negative significant relationship between exchange rate fluctuations and foreign direct investments. The third objective reveal that the there is a long run relationship between exchange rate fluctuations and foreign direct investments in Uganda (1986-2019). The study conclude that exchange rate tends is generally increasing in a negative form, since the devaluation of the Ugandan currency in 1989, there has been consistent depreciation of the country’s currency. The study conclude that the existence of exchange rate fluctuations in the long run significantly affect the foreign direct investments in Uganda over the period of the study. The study concludes that exchange rate fluctuations have reduced the level and value of foreign direct investments in Uganda. Thirdly, the study found that there is a long run relationship between exchange rate fluctuations and foreign direct investments in Uganda (1986-2019). The study results indicate that exchange rate fluctuations reduced the state of foreign direct investments in the country is possibly scared off by the exchange rate fluctuations in Uganda. The study recommends that the trend of exchange rate is unstable; the stability of the exchange rate is needed, not at a fixed level but by controlling exchange rate volatility using the exchange rate target band. The study recommends that foreign direct investments need to be developed; there is need for schemes of tax holidays, provision of land to the foreign investors needed to generate the increase in investments schemes. Secondly, in the short run, since we have established from this study that exchange rate fluctuations weakly impact on FDI inflows, other factors may play a more significant role in attracting foreign capital to Uganda. These may include factors like an unfavorable political climate, stagnation in growth and development of key and emerging sectors in the country like agriculture tourism and manufacturing. It would therefore be important for policy makers not to put a lot of effort in influencing exchange rates but more on setting up policies that influence the other determinants of FDI. Thirdly in the long run, the study has found that exchange rate fluctuations significantly but lowly affected on FDI, the other macroeconomic indicators be the main focus in developing policies aimed at creating a favorable economic environment that can attract FDI to Uganda.
Description
A research report submitted to the college of economics and management in partial fulfillment of the requirements for the award of Master of Arts of economic policy and planning in Kampala International University
Keywords
exchange rate, Foreign, Direct investments, Uganda