Determinants of private domestic investments in Uganda

Abstract

This study examined the determinants of private domestic investment in Uganda. The macroeconomic variables used included; private domestic investments, GDP growth rate, inflation, trade openness, debt service, foreign aid, broad money, real interest rates and gross domestic savings. The results were estimated using co-integration and error correction model to analyze the long and short run equilibrium among the variables. The objectives of the study were to establish the long run determinants of private domestic investment and examining the short run determinants of private domestic investment. The long-run determinants of private domestic investment in Uganda are; GDP growth rate, inflation, trade openness and broad money supply at 5 percent level while debt service, foreign aid, real interest rates and gross domestic savings were insignificant in the long run. On the other hand, the short run determinants of private domestic investment are; lagged inflation in one and two periods respectively, lagged debt service lagged in two periods, lagged foreign aid in two periods and lagged real interest in one period. It was also established that while private domestic investment may drift apart in the short run, the disequilibrium between the variables adjusted by about 71.80 percent towards their long run equilibrium within a year. The study calls for improving the productivity of sectors such as agriculture and manufacturing by providing more efficient and advanced technologies as input subsidies as a way to increase private investment levels and growth in output. More efforts should be made to promote fixed domestic investment for export and domestic consumption which calls for trade liberalization to be selective, protective and supportive to domestic production where potential future international competitiveness is possible. It is further recommended that monetary policies which relate mostly to the control of the cost, supply/ availability and direction of money be reviewed periodically and ensure that such policies are implemented with little or no lag. Also, the rate of inflation should be kept under check to ensure that savings and investment are accelerated as an increase in inflation tends to lower the bulk of private domestic investmen