Impact of external debt on economic growth in Uganda (1985-2019)

Abstract

Uganda has had a troubled history of foreign borrowing due to urgency need to finance the budget deficit and also finance other sectors such as infrastructure. For example under the Highly Indebted Poor Countries (HIPCs) initiative, Uganda was the first country to receive a debt relief of worth US$650 million in the 1990s and later in 2006, under the Multilateral Debt Relief Initiative (MDRI), the country generously received 100% debt forgiveness/cancellation which consequently reduced the stock of country’s debt to $1.6 billion. However the external debt has continued to increase despite the debt forgiveness. Therefore the study examined the impact of external debt on economic growth in Uganda both in the short and long run. The study employed the Non- Auto Regressive Distributed Lag (ARDL) model. The ARDL bounds test revealed the presence of a long run relationship among the variables. The techniques of Estimation employed in the study include Augmented Dickey Fuller (ADF) test, ARDL F-Bound Co-integration and Vector Error Correction Mechanism. The non linear ARDL model indicated that; one period lagged positive changes in real interest rate and one period lagged negative changes in inflation rate had statistically significant impact on economic growth in the long run whereas negative changes in external debt to GDP ratio and positive changes in real interest rate had statistically significant impact on GDP in the short run.This result is in line with the study expectations and some findings by earlier researchers who found a negative impact of external debt on GDP . The results suggest that the current trend of Uganda’s borrowing is to continue constraining the resources in the short run. The study recommended the adoption of borrowing in local currency terms by the government of Uganda from the bilateral and multilateral development partners to reduce on the cost of debt and also avoid foreign exchange rate risk. The study recommended investment of the external debt in only the productive activities that may add value to the economy and then increase GDP.