Effect of foreign exchange fluctuations on profitability of export companies: a case of Kyagalanyi coffee limited

Abstract

This study focused on the effect of foreign exchange fluctuation on profitability of export companies, a case study of Kyagalanyi coffee limited. The objectives of the study include; to assess the effect of exchange rates with interest rates and inflation, to examine the relationship between the volume of exports and profitability of Kyagalanyi Coffee Limited and to determine the trend of foreign exchange rates in Uganda. The findings of the study revealed that there is a strong positive relationship between foreign exchange fluctuation and profitability of export companies. The study used yearly secondary time series data in the period (2000-2020) from World Bank, UBOS, NBS and primary data through self-administered questionnaires. Random and purposive sampling techniques to draw representative samples were used and 50 respondents were involved in the study. Respondents in Kyagalanyi Coffee Limited filled the questionnaire. The regression results revealed that there is a positive relationship between dependent variable (profitability of kyagalanyi coffee limited) and independent variables (foreign exchange rate (0.913), interest rate(0.084)) and a negative relationship with inflation rates (-0.051). From these results, the study recommended that policy makers need to maintain a robust exchange rate regime that will ensure a non-volatile behavior. Policy measures aimed at mitigating the high exchange rate volatility to promote coffee exports from Uganda need to be instituted. In order to cushion exporters from high exchange rate fluctuations, the government could set up a coffee export stabilization facility. The fund could be capitalized by charging exporters a tax so that during periods of high coffee prices and high export earnings, the country would accumulate the fund which it would draw down during periods of low coffee prices. There is need for policy makers to work towards increasing the volume of exports through diversification of market destinations by targeting local, regional and export markets as opposed to the current practice. This can be realized through regional and export market promotion initiatives as well as consistent compliance with quality standards. Innovative ways of meeting the standards and facilitation of smallholder farmers to meet these standards is required. In addition, coffee export promotion incentives such as input subsidies and tax concessions need to be considered. To reduce the relative price of coffee exports from Uganda, there is need for structural reforms that contribute to increased productivity and the enhancement of international competitiveness.