Effect of foreign aid on economic growth in Uganda

Abstract

This study investigated the effect of foreign aid on economic growth in Uganda using annual time series data for the period 1983 to 2017. The main approach used was the ordinary least squares. Presence of long run equilibrium among the series was tested using the Johansen co-integration test. The error correction approach was then used to estimate the speed of adjustment to deviations from long run equilibrium. In both long and short run, foreign aid had a significant negative and positive relationship with economic growth respectively at 5 percent level. With regard to other macroeconomic variables, only broad money growth had significant negative relationship with economic growth in the long run at 5 percent level. It was further established that while economic growth may drift apart in the short run, the disequilibrium adjusted by about 58.8 percent towards their long run equilibrium annually. The study recommends the government of Uganda to direct foreign aid to productive sectors of the economy that spur economic growth in both short and long run since foreign aid supplements domestic sources of finance.