MJAMR

Determinants of Foreign Exchange Rates in Uganda

Kamugisha Nelson, Arinaitwe Julius


Abstract

This study aims to empirically investigate the key macroeconomic and financial factors influencing fluctuations in Uganda's monthly exchange rate against the US dollar over the period 2010 to 2020. Monthly time series data spanning this duration was compiled from various sources for seven potential exchange rate determinants and the dependent variable. Exchange rate and inflation figures were obtained from the Bank of Uganda, while trade, GDP, interest rate and capital flow data originated from the Uganda Bureau of Statistics and Ministry of Finance databases. International indicators for major trade partners were gathered from IMF statistics. Utilizing this comprehensive secondary data, rigorous time series and multivariate statistical analyses were conducted to quantify both the short-term and long-term impacts of each determinant. Stationarity and cointegration techniques were employed to address non-stationary properties, validating a Vector Error Correction Model framework. Econometric software programs EViews and SPSS were leveraged to perform Vector Error Correction, unit root, serial correlation, heteroskedasticity, correlation, regression modeling, and residual diagnostics. There is a strong positive correlation between GDP and foreign direct investment, with a Pearson correlation coefficient of 0.845 and a significance level of 0.000, indicating a very significant relationship. GDP has a moderate positive correlation with exports, with a Pearson correlation coefficient of 0.259 and a significance level of 0.000, also showing a very significant relationship. This rigorous methodology systematically analyzed the short-run dynamics, long-run equilibrium relationship, inter-variable correlations and individual influences in meticulous detail. The results provide valuable empirical evidence on the complex set of macroeconomic forces driving Uganda's exchange rate fluctuations with important implications for monetary and trade policymaking.

Keywords

GDP interest rate foreign direct investment and capita flow
Metropolitan Journal of Academic Multidisciplinary Research

Cite This Article

Kamugisha Nelson & Arinaitwe Julius (2024). Determinants of Foreign Exchange Rates in Uganda. Metropolitan Journal of Academic Multidisciplinary Research, 3(2). https://journals.miu.ac.ug/pages/article.php?article_id=1699

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