The impact of real effective exchange rate volatility on Uganda’s exports (1990-2020)

Abstract

The main objective of this study was to investigate the impact of real effective exchange rate volatility on exports in Uganda. The data used in the analysis was annual secondary time series obtained from the World Bank website (World Bank development indicators). The dependent variable of the study was Exports whereas Real Effective Exchange Rate, Inflation, Real Effective Exchange Rate Volatility and GDP were the independent variables. Analytically, the study generated an Auto Regressive Distributed Lag Model and the Bounds test for cointegration 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 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 the Cumulative Sum Squared (CUSUMQ) Stability test for the model. The findings of the study indicate that Real Effective Exchange Rate volatility was found to have a significant negative effect on exports in Uganda in the short run. 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 exports.