Implication of external financing on economic growth in Uganda
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The need to balance the savings-investment gap and offset fiscal deficits in developing countries over the years has continued to propel and compel their governments to source for external finance outside of domestic revenues and internal borrowing to bridge this gap with the intention of achieving economic growth and poverty reduction. This is usually in the form of Official Development Assistance (ODA), Foreign Direct Investment (FDI), External Debt Stock (EDS). However, there is no solid consensus among scholars on the actual effectiveness of external financing inflows in economic growth and development Given its importance to the economies of developing countries, it is therefore important to understand and evaluate the contribution of external financing, specifically ODA, FDI and EDS to economic growth in Uganda and thus this study. A co-integrating test to determine the relation among the variables and establish whether there exists a long run relation between them was done using Vector Auto Regression (VAR) methodology. The set of variables were found to have at most four (4) cointegrating vectors, and the VECM (Vector Error Correction Model) estimation technique which adjusts to both short run changes in variables and deviations from equilibrium was used. The error correction term in the VECM model showed that external financing has no effect on economic growth of Uganda in the short run. The VECM results for long run relationship between the variables further revealed that external financing significantly influences economic growth in the long run in Uganda, with external debt stock and official development assistance showing a significant negative effect, while foreign direct investment revealed significant positive effect on economic growth. The study concluded that external financing variables can be veritable tools for long run economic planning for a developing country like Uganda. However, the use of external financing, especially, external debt, foreign direct investment, and official development assistance for short run economic challenges would be counterproductive. It is therefore recommended that the government of Uganda must adopt fiscal adjustment mechanisms that can enhance its revenue profile through improved taxes rather than borrowing, attract FDI into Uganda by creating an enabling macroeconomic environment while foreign aid should be critically monitored and scrutinized by the government.