The Relationship Between Foreign Aid Inflows, Real Exchange Rate and Export Performance in Developing Countries: The Case Study for Uganda

This research investigates the relationship between Foreign aid inflows, real exchange rate and exports in Uganda from 1982-2004.With the intension of coming up with the policy implications. Using OLS and Cochrane Orcutt estimation methods, we empirically tested the effect of the aid inflows on the real exchange rate and also the effect of the exchange rate onto the exports .And the results revealed that an increase in Aid inflows within the Ugandan economy brings about the real exchange rate depreciation. And on the other hand it was found out that an appreciation of the real exchange rate can bring about a loss of competitive of the Ugandan exports. This paper concludes that the Uganda should not be afraid of receiving more Aid inflows but take a cautious look on the real exchange rate management to reduce the exports vulnerability to loss of competitiveness. Secondly it should focus on increasing investment as it has a significant and positive effect on the export sector.