External debt and economic growth in Uganda

Abstract

The broad objective of this study was to ascertain the relationship between external debt and economic growth in Uganda. The variables in the study were specified in a multivariate framework and the researcher employed the Johansen co-integration technique and the Error Correction Model to estimate the effect of the independent variables on the dependent variable in both the long run and short run; Ordinary least squares (OLS) method was employed to estimate the unknown parameters in a linear regression model and the Granger Causality test was done to test for the direction of causality. It was concluded from the findings that economic growth is responsive to external debt in Uganda. This is evidenced by the negative and statistically significant coefficient at the 5 percent level of statistical significance. External debt is a real problem in Uganda because it adversely affects economic growth. It is also a significant predictor of economic growth in Uganda since causality runs from external debt to economic growth. Thus measures should be taken to curb this issue which may become endemic in the economy resulting in a danger to sustainable growth and development. The study recommended a reduction in expenditure on debt servicing, efficient allocation and utilization of external debt on more productive and development expenditures and control of hyperinflation and policy measures such as effective monitoring of debts, Borrowing for priority sectors as well as effective usage of domestic borrowed funds to mitigate the effect of external debt on the economy.