REER, Inflation, Interest Rate and Uganda’s Coffee Exportation

Abstract

This study examines the effect of the REER (real effective exchange rate) known as the relative currency value, inflation, and interest rate on the exportation of coffee in Uganda. To achieve the study's objectives, the study employed an Auto Regressive Distributive Lag Model using annual data from 1990-2019. It was discovered to have a beneficial effect on coffee export volumes in the long run when the relative currency value appreciates, while short-run appreciation of the effective currency rate has a negative effect that carries over to a three-year period. An increase in the rate of inflation has a positive effect on coffee exports in the two year short run, but in the longer term, an increase in the inflation rate has a negative effect. An increase in the lending rate has a negative effect on coffee exports in the two-year short term as well as in the first and third year, but in the long run, the effect is positive. The coffee production capacity of Uganda was captured by the estimated model through the incorporation of a variable on the volume of coffee production that was found to have a positive effect in both the short and long run periods. The study observes that the responsiveness of the volume of coffee exports to the responsiveness of IVs is low, an indicator that Ugandan coffee exports are facing inelastic demand on the global market. The study thus recommends that the government seize this golden chance with its hands by making cheap capital available to farmers, processors, and exporters, issuing more export licenses and encouraging more households to produce more coffee.