An analysis of the effect of public debt on economic growth in Uganda

Abstract

The main objective of this study was analysing the effect of public debt on economic growth of Uganda (1992-2021). This study used secondary time series data, which was obtained from Uganda Bureau of Statistics (UBOS), International Monetary Fund (IMF) and World Bank development indicators. Furthermore, the study used Augmented Dickey–Fuller (ADF) unit root test to check whether the variables are non-stationary by taking the null hypothesis as ‘there is the unit root’ against the alternative hypothesis ‘there is no unit root’. Due to the low power and other problems associated with these test methods, the OLS-based autoregressive distributed lag (ARDL) approach to co-integration has become popular in recent years. This research used a multiple linear regression model to examine the effect of public debt on economic growth of Uganda. The regression results revealed that while Years spent at school had a beneficial impact on growth by increasing productivity, public debt, inflation, and interest rates considerably slowed economic growth. Population growth, trade openness, and investment were not important variables. Overall, the results highlight the importance of careful debt management, macroeconomic stability, and human capital investment in maintaining Uganda's long-term economic growth. The study recommends that to avoid excessive borrowing impeding economic growth, Uganda should maintain appropriate governmental debt levels. Fiscal strain can be lessened by putting in place stringent debt restrictions and giving priority to profitable initiatives. Furthermore, since rising prices have a detrimental effect on GDP growth, macroeconomic policies should work to maintain moderate and stable inflation. Careful monetary policy and supply-side factor monitoring can help achieve this. Last but not least, the central bank should make sure that interest rates continue to be favorable for investment and company growth. Because high borrowing costs discourage economic activity, it is crucial to strike a balance between promoting growth and containing inflation.