The Impact of Exchange Rate Volatility on Trade Balance: Empirical Evidence From Uganda: 1990-2015
The study seeks to analyze the extent to which exchange rate volatility has impacted the trade balance in Uganda, a regression model and a granger causality test were applied on annual data for the period 1990 to 2015, extensive literature was reviewed in line with the topic under study. The results revealed that exchange rate volatility negatively impacts Uganda’s trade balance, however this impact was not statistically significant. At the same time, Trade Balance was found to be positively correlated with exchange rate volatility. Additionally, exchange rate did not granger cause trade balance going by the Granger causality test. This is consistent with the fact that even though the country has experienced preponderant currency depreciation year in year out, it has not resulted into an improvement in the country’s trade balance.The results may be linked to inadequate infrastructure, poor policy framework and implementation, in the midst of which exchange rate depreciation has been constrained in achieving the set goals. The study therefore recommends that measures geared towards improving the real sector will help enhance exports whilst cutting down non-productive and unprocessed imports. Exchange rate stability should therefore be stimulated through attracting foreign private investments as well as implementing well-coordinated macroeconomic policies that impact inflation positively.
Index Terms - Currency Depreciation, Exchange Rate, Trade Balance, Volatility