Impact of capital inflows on the real exchange rate in Uganda

This study investigated the impact of capital inflows on the real exchange rate in Uganda for the period 1987-2000. Time series data were obtained from annual and quarterly reports of the Bank of Uganda, Ministry of Finance Planning and Economic Development as well as from Uganda Revenue Authority and was analyzed using E-views computer soft ware and tested by using an error correction method. A number of independent variables were included in the model. Government expenditure, technological progress, degree of openness of the economy and capital inflows were revealed to be the most significant in influencing the real effective exchange rate (REER) with 0.56, 0.24, 0.18 and -0.06 as coefficients of variability, respectively. Capital inflows which was a major focus of this study, revealed a depreciating impact on REER. This indicates that capital inflows cause REER depreciation. Further this reveals that the expenditure of the capital inflows was made on non-tradable goods sector in the economy. Therefore, there is need to accelerate production of non-tradable goods and encourage more capital inflows into the economy as government reduces expenditure on less productive tradable sectors. This will help minimise the unwanted appreciation of the domestic currency.