Effect of exchange rate fluctuations on Uganda’s imports (1998Q1 – 2016Q4)

Abstract

This study investigated the effect of exchange rate fluctuations on Uganda‟s imports from 1998 to 2016. The main approach used was the ordinary least squares to test for the long-run relationship. The error correction model was applied to test for short run relationship with the Error Correction Term to determine the speed of adjustment between the short-run and the long-run equilibrium and the Engle and Granger (1987) was applied to test for the long-run causal relationship between the variables. Quarterly data was used and 76 data points were used for analysis. The log-log model was used to ascertain the effect of exchange rate fluctuations on Uganda‟s imports. The objectives of the study were to establish the descriptive link between exchange rate movements and imports and to determine the causal nexus between exchange rate volatility and import of goods in Uganda. The empirical results show that there was one co-integration equation showing the long run relationship amongst exchange rate movements, real GDP, TOT and exchange rate volatility. The findings further revealed that exchange rate movements had a negative and insignificant effect on imports in the long run and exchange rate volatility depressed imports. The coefficient of one period lag residual was negative and significant which represented the long run equilibrium. The coefficient was -0.51 meaning that system corrected its previous period disequilibrium at a speed of 51% quarterly to reach at the steady state. It further revealed a Uni-directional causal relationship between exchange rate volatility and imports. The study recommends that policy makers in Uganda should consider exchange rate policies as a long-run fix to the problem of growth in foreign goods demand since exchange rate volatility was found to have significant effect on Uganda‟s demand for foreign goods in the long run.