EXCHANGE RATE MISALIGNMENT AND FINANCIAL LIBERALISATION: Exchange Rate Misalignment and Financial Liberalisation: Empirical Evidence and Macroeconomic Implications for Uganda, 1993-2004

This study empirically investigates Uganda’s equilibrium real exchange rate (EREER) during 1993M1 to 2004M12. Using ARDL approach to cointegration, we find that a long-run relationship exists between Uganda’s REER and its determinants, driven largely by trade balance, openness, fiscal deficits, and capacity utilization. Consequently, we estimated a long-run EREER model. Comparing the actual REER and the EREER reveals that Uganda’s REER is overvalued over the recent period, 2003-2004. The macroeconomic financial costs of this overvaluation are found to be quite high for the Ugandan economy. Policy-wise, the results suggest that appropriate policy must aim at avoiding exchange rate overvaluation in support of external macroeconomic stability.