External debt and economic growth in Uganda (1990-2021)

Abstract

This research report investigated the effect of external debt on economic growth in Uganda using annual time series data of 1990 to 2021. It was guided by objectives that is to investigate the effect of external debt on Uganda’s GDP, to examine the composition of Uganda’s external debt and to assess the role of external debt in financing infrastructure and other development projects. The study used the theoretical Solow growth model (Solow, 1956) which indicates that GDP growth is determined by capital, labour and technological progress and follows the model by Sala-i-martin, 1997 and Azamet al, 2013 who determined the role of external debt in economic growth. Secondary data was the basis of data used in this study and it was sourced mainly from the World Development Indicators of 2022 on the variables of gross domestic product, external debt stock, external debt service, inflation, government expenditure, gross capital formation, labour force for the period 1990-2021. The Autoregressive Distributed Lag (ARDL) model estimation technique is used augmented by the bounds test. The study reveals that in the long run the variables of external debt stock and inflation are negative and significantly related to economic growth while gross capital formation is positive and significantly related to economic growth. Post estimation tests conducted reveal that the model is well specified given the Ramsey RESET test; the residual from the model has no serial correlation given the Breush- Godfrey LM test; the error terms are homoscedastic given the Breush-Pagan test; there is no multicollinearity given the VIF test; residuals are normally distributed given the Jarque –Bera normality test. It was concluded that Uganda has relied heavily on foreign debt to cover its saving and investment gap and the impact of external debt on economic growth is multifaceted. In the short run, it can provide a boost to economic activity, while in the long run, it carries risks related to debt servicing and sustainability. Prudent debt management, careful allocation of borrowed funds and a stable economic and political environment are key to maximizing the benefits of external debt for economic growth while minimizing its potential drawbacks.