Analysis of determinants of balance of payments in Uganda (1994-2019)

Abstract

The overall objective was to find out the determinants of balance of payments in Uganda using time series data of 1994-2019. It specifically found out the effect of foreign direct investment net inflows, real effective exchange rates and inflation rates on Balance of Payments in Uganda. Study findings indicated that on average Uganda had 559 million US dollars foreign direct investments with a standard deviation of 391 million US dollars. FDI series data were normally distributed and stationary after the first difference after using Augmented Dickey-Fuller test. FDI was found having a high negative relationship (R-value = -0.88) with the country`s balance of payment whereas using a linear regression model, FDI net inflows had a significant effect on Balance of Payments in Uganda (p<0.05). Study results also indicated that real effective exchange rates (REERt) index from 1994 to 2019 were highly positively skewed (Skewness = 1.09), therefore with a median of 104.99. REERt series were tested for stationarity using Augmented Dickey-Fuller and the series were stationary since its ADF test statistic (-4.41) is greater than 5% critical value (-3.00). Pairwise correlation found a moderate positive significant relationship (R-value = 0.52) with balance of payment (BoP) in that an increase in real effective exchange rate would significantly increase the balance of payment for the country and using a linear regression model, real effective exchange rates (REERt) had no significant effect on Balance of Payments in Uganda. The study found out that the average Uganda’s inflation rate was 6.30% with a standard deviation of 3.94. The inflation rates series were tested for stationarity using Augmented Dickey-Fuller for unit root taking null hypothesis that the series have a unit root at 5% level of significance and was stationary after taking the second difference. Pairwise correlation was used to test the bivariate relationship between inflation rates and BoP; inflation rates had no significant relationship with balance of payment in Uganda. Using a linear regression model, inflation rates also had no significant effect on Balance of Payments in Uganda. The study concluded that Foreign Direct Investments net inflows (FDI) and Real Effective Exchange rates have a significant impact on Uganda’s Balance of Payment. The study recommended that the government of Uganda should work on both fiscal and monetary policies and structural adjustment in order to encourage and attract private investment flows (local) and increase trade. The study also recommended that the government of Uganda should work on its monetary policies to ensure the stability of foreign exchange rates and reduce on depreciation of a Ugandan shilling.