The time series analysis of nominal exchange rate instability and its effect on Uganda's inflation over the period from 2005 To 2016

Abstract

Exchange rate stability is one of the factors that promote total investment, price stability, trade and stable economic growth. The main objective of this research was to analyse the influence of exchange rate instability on Uganda’s inflation for the period 2005-2016. Descriptive design and regression analysis was deemed best strategy to fulfil the objectives of the study. The study covered a period of 11 years that is 2005-2016. In this research secondary data was collected from Uganda Bureau of Statistics (UBOS) and Bank of Uganda website. The average US dollars, total exports, imports, nominal exchange rates and inflation rates were used in the analysis as intervening variables. A regression model was used to test the stated hypothesis in the study whereby hypothesis on estate that there is no relationship between foreign exchange rates instability and inflation rates. It was found out that there was a negative relationship between exchange rates and inflation since an increase in foreign exchange rates resulted in a depreciation of the domestic currency which led to an increase in the price of imports hence imported inflation. There was also an insignificant relationship since p=0.32550>0.05 at 95% level of confidence since exchange rates cannot be used reliably to predict the movements in inflation rates. There was also insignificant relationship among imports, exports GDP and inflation at 5% level of confidence. Major recommendations included; (1) The study concludes that there is an insignificant relationship between inflation and exchange rates and therefore recommends that the policymakers should focus on declining agriculture sector which results into increased prices of food stuffs and resulting into inflation in Uganda, (2) the study also recommends that the government should support local industries and improving on relative prices of exports in order to improve the value and volumes of exports. Doing this will strengthen the balance of payments and therefore lead to higher growth rate of exports than spending much on imports only. This will curb down inflation rates in the country.