Impact of selected macroeconomic variables on Uganda’s economic growth (1980-2017)

Abstract

The study investigated the impact of selected macroeconomic variables on Uganda’s economic growth. It specifically analyzed the effect of variables; initial Gross Domestic Product (GDP), gross capital formation (GCF), foreign direct investment (FDI), human capital, inflation, real interest rate (RIR) and real effective exchange rate (REER) on Uganda’s GDP growth. Secondary data was used in conducting the study, and this was extracted from the World Development Indicators as published by the World Bank for the period between 1980 and 2017. Other data used was from documented records of studies carried out by the International Monetary Fund (IMF) and the Bank of Uganda (BOU). The study used the theoretical model of Solow (1957) or neoclassical model as reviewed by Wilson & Briscoe (2004). A lin-log regression method was used for analysis of the collected data to obtain the variables’ results. The major findings show that initial GDP has insignificant effect on economic growth. A similar finding applied to Gross capital formation (GCF), Human capital and real effective exchange rate. On the other hand, the results showed that Foreign Direct Investment (FDI) positively and significantly affects GDP growth rate in the two models. Inconclusive results were obtained for the case of inflation rate. The study concluded that gross capital formation (GCF), foreign direct investment (FDI), human capital, real interest rate (RIR) and real effective exchange rate (REER) have been rising over the period. Regression results showed that FDI had a significant effect on economic growth hence highlighting the importance of FDI to the economy. The study also concluded that real interest rate had a positive effect on economic growth. The study recommended that the government through its financial and economic policy planning organs such as the central bank needs to take into policy measures to attract and ii increase FDI inflows into Uganda. REER control policies and inflation rate targeting should be exercised in order to create a good environment for economic growth.