Assessing the macroeconomic drivers of economic growth in Uganda

Abstract

This study assessed the macroeconomic drivers of economic growth in Uganda using annual time series data from 1994 to 2024 obtained from the World Bank World Development Indicators. The analysis examined the short-run and long-run effects of foreign direct investment (FDI), inflation, and trade openness on real GDP growth rate using the Autoregressive Distributed Lag (ARDL) model. Unit root tests revealed a mix of I (0) and I (1) variables, while the ARDL bounds test confirmed the existence of a long-run relationship among the variables. Short-run results showed that lagged GDP growth strongly and positively influenced current growth, indicating persistence in economic performance. FDI exhibited positive short-run effects in earlier lags but turned negative in later periods, suggesting delayed benefits and possible diminishing returns. Inflation had both negative immediate effects and positive lagged effects, implying that mild inflation may stimulate short-run activity while excessive inflation becomes harmful. Trade openness had initial contractionary effects but later produced substantial positive contributions after adjustment lags. Long-run estimates revealed that FDI negatively and significantly affected economic growth, while inflation remained insignificant. Trade openness, however, exerted a strong positive long-run influence. Diagnostic tests confirmed that the model was stable, well-specified and free from major econometric problems. Overall, the findings underscore the importance of enhancing trade integration, improving the productivity of FDI and maintaining macroeconomic stability to support Uganda’s sustainable economic growth. In addition, there is a need to strengthen institutional quality and governance frameworks to improve investor confidence and ensure efficient allocation of resources. Efforts should focus on diversifying exports beyond primary commodities and promoting value addition in agriculture and manufacturing to enhance competitiveness in international markets