The effect of foreign capital inflows on domestic savings in Uganda (1987-2006)

Abstract

There has been contention about the effect of foreign capital inflows on domestic savings in developing countries. Mixed results have been presented with some researchers showing a negative effect, whereas others have shown a positive effect. In Uganda particularly, there has not been a clear picture to show a negative or positive effect of foreign capital inflows on domestic savings.

The study was undertaken to assess the effect of foreign capital inflows on domestic savings in Uganda. The objectives of the study were to find out the short and long-run effects of foreign capital inflows on domestic savings. Variables were transformed in order to improve the normality. In order to address the first objective, the error correction model was constructed to provide dynamics of the short that lead to long-term equilibrium effects of foreign capital inflows on domestic savings in Uganda. The variables were further put to the unit root test to identify the order of integration. Cointegration was then undertaken to find out the long run effect of foreign capital inflows on domestic savings

It was found out that there is a negative relationship between foreign capital inflows and domestic savings in the long run. The error correction model also confirmed the short run movements gradually converge to equilibrium in the long run.

The study recommends caution in allowing in foreign capital inflows as too much inflow of capital may discourage savings, though the type of inflows should also be considered since they have a different degree of effect on the domestic savings.