Relationship between public debt and economic output in Uganda (1990—2020)

Abstract

The main objective of this study was to examine the relationship between Public Debt and Economic output in Uganda from 1990 to 2020. Secondary data was used from World Bank Website’s World Bank Development Indicators. This study used an Auto Regressive Distributed Lag (ARDL) model to estimate both the long-run and short-run relationships between Public Debt stock and Economic Growth, and the Granger causality test was applied to test for causality effects among the main variables of the study. The variables that were examined in this study included Gross domestic product (GDP), Total debt stock, Total debt service, Real interest rate, Foreign direct investment, and Government consumption. The long-run results revealed that foreign direct investment and total debt stock influenced Gross Domestic Product, while in the short-run, the study revealed foreign direct investment, total debt stock and total debt service influenced Gross Domestic Product thus Economic Growth. Particularly, the study revealed that in the long-run, a 1% increase in foreign direct investment will lead to a 0.192% increase in GDP in Uganda. Furthermore, the study revealed that a 1% increase in total debt stock leads to 0.0001% increase in GDP. On the other hand, in the short-run the study revealed that a 1% increase in foreign direct investment was associated with 9.9% and 22.2% increase in GDP at current and at lag two and a decrease (-16.2%) at lag one. As for total debt stock, the study revealed that a 1% increase in total debt stock was associated with a 0.001% increase in GDP at current and a 0.001% decrease at lag one. In regards to total debt service, the study revealed that A 1% increase in total debt service was associated with a 0.17% decrease in GDP at current and 0.2% increase in GDP at lag one.

Therefore, this study recommends that Government should ensure proper use of public debt to maximize returns from the debt to boost Economic output and further development. However, in as much as an increase in debt stock increases total output, debt servicing may take a bigger share of the resources thus may hinder growth. Therefore, policies should be put in place to ensure that debt servicing is sustainable if the country is to have an increase in total output, enhance on donor flows and improve on domestic revenue generation by the Uganda Revenue Authority.