Effect of foreign aid on Uganda’s real gross domestic product

Abstract

This study investigated the effect of foreign aid on Uganda's Real RGDP both in the short and in the long run using an Autoregressive Distributed Lag (ARDL) model. Two primary hypotheses were tested: (1) Foreign aid has a significant effect on Uganda’s Real GDP in the short run, and (2) Foreign aid has a significant effect on Uganda’s Real GDP in the long run. The study utilized secondary time series data the analysis covered the period of 34 years, from 1990 to 2023. The main independent variable is foreign aid, controlled by foreign direct investments, labor, human capital index, trade openness, investments, and technological progress. The ARDL results reveal that foreign aid has a statistically significant negative impact on Uganda's Real GDP in the short run, suggesting inefficiencies or delays in the absorption and utilization of aid. In the long run, however, foreign aid shows a significant positive relationship with Real GDP, indicating its potential to foster economic growth if allocated to productive sectors. The findings suggest that while foreign aid can be beneficial in promoting growth over time, its short-term effectiveness depends on the country’s capacity to manage and utilize the funds efficiently. Key policy recommendations would include improving the institutional capacity for managing aid, ensuring strategic allocation to high-impact sectors, and enhancing domestic resource mobilization to reduce reliance on foreign aid. This study contributes to the ongoing debate on the role of foreign aid in promoting sustainable development, particularly in the context of developing economies like Uganda.