Relationship between external debt stock and inflation in Uganda (2006-2018)

Abstract

This study investigated the extent to which external debt stock has affected inflation from 2006 to 2018. The main objective was to establish the relationship between external debt stock and inflation in Uganda using secondary quarterly data from Uganda Bureau of Statistics and Ministry of Finance, Planning and Economic Development. The main approach used was the ordinary least squares to test for the long run relationship, the error correction model was applied to test the short run relationship and the Granger causality test was applied to test for causality among the variables. The variables that were investigated on in this study included external debt stock, inflation, money supply, government expenditure, exchange rate, interest rates and gross domestic product. The Granger-causality tests showed that external debt stock granger causes inflation but inflation does not granger cause external debt thus a unidirectional relationship running from external debt stock to inflation. The results further showed that external debt stock, government expenditure, gross domestic product and money supply had a positive effect on inflation in the long run. This implies that a 1% increase in external debt, government expenditure, gross domestic product and money supply leads to about 0.08%, 0.12%, 0.27% and 0.20% increase in inflation, respectively at 5% level of significance. From the short-run model, the error correction term results show adjustment toward equilibrium by about 12% within a quarter. The study recommends the government to reduce the external debt levels and resort to spending what is available in order to reduce the level of changes in prices in the economy and also it should ensure appropriate channeling of its expenditure into productive ventures for instance infrastructural development in order to stimulate investment and production hence stabilizing prices.