Modelling Uganda's Trade Balance Determinants and Forecast using the ARMA Model

The existing body of research on determinants of trade balance suggests that real sector macroeconomic factors are the crucial determinants of trade balance. For example, Ochan (2024) pointed out real GDP, Inflation, and Gross capital formation as long-run determinants of trade balance. Hunegnaw and Kim (2017) highlights GDP as a vital determinant. However, many of these studies up to now have concentrated on the exchange rate and exchange rate volatility as a focal point, emphasizing a one-sided approach of the conventional elasticity theory. This study addresses this gap by exploring both real and financial sector factors that incorporate the monetary, elasticity, and the Keynesian approach. This study employed monthly time-series data from the Bank of Uganda, particularly the monetary disseminated indicators web-file. The data span from July 1993 to October 2025 to investigate the determinants of trade balance between the real and financial sector factors and produce a forecast model for the incoming 12 months. Both descriptive and inferential analyses were performed. These included a summary of descriptive statistics, pairwise correlation, and some pre-estimation time series tests, such as unit root tests, cointegration tests, and lag selection tests to select the ARMA as the suitable model. From the real sector factors, findings showed that exchange rate depreciation exacerbates the trade deficits. Besides, a higher lending rate constrains the import expenditure, raising export growth through local production, thus improving trade surplus. Furthermore, gross foreign exchange reserves negatively affect the trade balance of Uganda. On the other hand, financial sector factors have been found to both improve and shrink the trade balance of Uganda. Particularly, increments in the net domestic assets and private time and savings deposits significantly harm Uganda's trade balance, while net credit to the government, domestic credit, and money supply improve the trade balance. Conversely, government net borrowing, domestic credit, and money supply boost the trade balance, especially if invested in productive activities that increase export growth.