Exchange rate volatility and exports in Uganda

Abstract

This study investigated the relationship between exchange rate volatility and exports in Uganda. It aimed to assess the presence of volatility clustering in the exchange rate, analyse the short run and long run effect of exchange rate volatility on exports and analyse the relationship between FDI and exports. World Bank annual data from 1960 to 2023 was used, and exchange rate volatility was computed from theoretical concepts. The ARCH-LM model was employed to detect volatility clustering in the exchange rate, while the ARCH family regression model estimated the relationships between the variables. The ARDL model estimated short run and long run relationship. From the ARCH model, the coefficient of 1.293 was statistically significant (p-value = 0.012) which signified the presence of volatility clustering in Uganda’s exchange rate. In addition, the coefficient for exchange rate volatility was insignificantly (-1.003, p-value = 0.068), indicating that there was no significant relationship between exchange rate volatility and exports. FDI and exports had a significant positive relationship (0.075, p-value=0.000). With the coefficient of -2.237 and a p-value of 0.036, the ARDL model found a negative long-run relationship between exchange rate volatility and exports. In conclusion, the study intended to investigate the relationship between exchange rate volatility and exports in Uganda using the ARCH and ARDL models. The study found out that volatility clustering was present in Uganda’s exchange rate implying that high volatility would lead to periods of more high volatility and at the same time lower volatility would lead to periods of more low volatility. Furthermore, the study found out that control variables like lending interest rate, tax revenue, and inflation positively significantly affected exports. Lastly, the study found out that exchange rate volatility had a statistically significant effect on exports implying that increased volatility would be detrimental to export growth. The study recommended that Uganda should implement regulatory measures such as margin requirements as well as limit leverage and speculation, implement market stabilisation policies, prioritise improving market microstructure, continue promoting exchange rate stability, diversify export products and markets, continue supporting programs of value addition, continue promoting foreign direct investment, and lastly start up programs aimed at educating exporters.