Effect of exchange rate volatility on economic growth: evidence from Uganda

Abstract

The relationship between exchange rate volatility and economic growth in Uganda remains inconclusive, with existing studies presenting contradictory findings. This study investigated the effects of exchange rate volatility on the economic growth of Uganda specifically, to find out if there is an exchange rate volatility clustering effect in Uganda and also investigate the clustering effect of exchange rate volatility on the GDP of Uganda. The study used EGARCH model to analyse exchange rate volatility and the ARDL model to assess its impact on Uganda's economic growth from 1990 to 2024. This study conclusively establishes the presence of significant exchange rate volatility clustering in Uganda over the period 1990–2024. On the other hand, exchange rate volatility had an insignificant impact on Uganda’s economic growth in both long and short run. It was further established that gross fixed capital formation was the primary driver of economic growth in Uganda in both the long and short run. The study recommends that policymakers should prioritize strategies that encourage domestic and foreign investment, this could include providing tax incentives for capital investment, improving access to affordable finance for businesses, and enhancing infrastructure to reduce the cost of production and attract long-term investment. Also, the central bank should adopt policies that mitigate excessive short-term fluctuations, such as using foreign exchange reserves to smooth extreme shocks, promoting hedging instruments for exporters and importers, and improving market transparency. Subject Keywords; Exchange rate volatility, Economic growth, Uganda