Effect of external debt on economic growth in Uganda

Abstract

Economic growth takes center stage in policy debates of all nation states given that it directly affects the living standards of the populace. Uganda’s ambitious targets of moving from a peasant society to middle-income status with an annual average of 520,000 jobs, a GDP per capita of USD 1,301 by 2024, and a per capita income of USD 9500 by 2040 have seen her acquire external debt to bankroll projects that are seen to be central in the realization of its vision. However, Uganda’s economic growth rate has slowed down in the recent past and is not commensurate with the envisaged growth by NDPIII and Vision 2040. This study examines the effect of external debt on economic growth in Uganda for a period of 1985-2021. To study the effect of external debt, trade openness and inflation on Gross Domestic Product (GDP), data is sourced from the World Bank development indicators (WDI, 2022). Results from the Augmented Dickey Fuller test indicated that the variables were a mixture of I(0) and I(1) and it was prudent to employ the Autoregressive Distributed Lag (ARDL) method for estimation. After performing the bounds test, the study established that there was no cointergration amongst the variables hence the short run ARDL model was used for the analysis. External debt in the current period had a negative significant effect on economic growth with elasticity of 0.032 while external debt after one year had a positive significant impact on economic growth with elasticity of 0.024. However, both elasticities were very small since they were less than 0.05 implying external debt had a minimal impact on economic growth. The study recommends that Government should ensure that i) external debt is invested in productive sectors and less in non-productive sectors; ii) institute good balance of payment policies; iii) encourage inflow of genuine Foreign Direct Investment; and iv) broaden the tax base by devising strategies to tax the untaxed informal sector.