Empirical analysis of the relationship between external debt stock and economic growth in Uganda (1989-2018)

Abstract

Back ground: External debt stock is a fundamental variable in understanding the dynamics of financing public sector investment across the world hence its implications on economic growth are an ever-growing concern in macro-economic policy. Uganda is no exception with her external debt stock increasing by over 238% in the last six years to stand at Uganda shillings 47 trillion as of 2018. Thus, this study empirically analysed the relationship between External debt stock and economic growth in Uganda over the period 1989-2018 to determine whether Uganda's rising external debt stock affects Uganda's economic growth. The study also aimed at ascertaining the individual relationship of the use of IMF credit, long-term and short-term external debt components with economic growth. To that effect, the study performed a stationarity test and specification tests of Heteroscedasticity (Breusch Pagan-Godfrey test), Multicollinearity, and Autocorrelation (Durbin Watson test) on the model to determine its viability. Results: The results generated using the Ordinary Least Squares (OLS) estimation technique show that external debt stock has a negative but insignificant relationship with economic growth in Uganda. All the individual components of external debt stock that are the use of IMF credit, long-term and short-term debt, also exhibited a negative relationship with economic growth thereby aligning with the general result. Conclusions: The study concluded that the government's increased external borrowing over the study period has not played a significant role in Uganda's recent recorded economic growth. Therefore, the study recommends that the Ugandan government consider taking a keen note not to rely upon external debt as an engine for capital accumulation to spur economic growth.