The impact of foreign debt on economic growth in Uganda

Abstract

The study examined the impact of external debt on economic growth in Uganda for the period 1982-2018 based on annual data sourced from the World Bank’s Development Indicators. The study examined the existence of Co-integration among the underlying variables using Auto-regressive Distributed Lag (ARDL) model after conducting preliminary statistical test to ascertain the normality of the variables as well as stationary of the data set using descriptive and unit root tests, specifically using the Augmented Dickey Fuller test and the Phillips Perron unit root test. The result of the ARDL test shows that a significant relationship exists between external debt and economic growth in the long run. Other control variables that were found to have a statistically significant relationship with GDP included; FDI, Population, Physical Capital, Trade Openness (positively related and this is consistent with Solow’s growth model) and Inflation which has a negative relationship with economic growth. From our findings, the study recommends that government and policy makers should minimize on the accumulation of external debt stock overtime and prevent concealing of the motive behind external debt; external debts should be obtained mainly for economic reasons (productive purposes) and not for social or political reasons. Evidence from other control variables indicates that there should be avenues to increase a) physical capital; for example, providing tax subsidies on the importation of capital goods, b) more foreign direct inflows through providing a conducive business environment for private investors like availing affordable credit, putting in place the required physical and social infrastructure; and c) also maintain a productive population as this is found to have positive impacts on growth especially in the long run.