Domestic savings and economic growth in Uganda: a time series analysis (1994 – 2023).

Abstract

This study examines the effect of domestic savings on economic growth in Uganda over the period 1994–2023, motivated by an apparent paradox in which gross domestic savings more than doubled, from approximately 7.7% to 18.8% of GDP, while GDP growth trended downward over the same period. Guided by the Harrod-Domar model, the Solow growth model, and the Loanable Funds Theory, the study pursues two specific objectives: to analyze the trend of domestic savings and economic growth in Uganda from 1994 to 2023, and to examine the long-run and short-run effects of domestic savings on economic growth over the same period. Annual secondary data on GDP growth, gross domestic savings, gross capital formation, and inflation were obtained from the World Bank World Development Indicators, while real interest rate data were sourced from Bank of Uganda annual reports. Trend analysis confirmed a statistically significant rise in domestic savings alongside a statistically significant decline in GDP growth. Augmented Dickey-Fuller tests showed that all series are integrated of order one, I(1), justifying the use of the Autoregressive Distributed Lag (ARDL) bounds testing approach. The bounds test confirmed cointegration among the variables at the 1% significance level. The long-run estimates show that domestic savings has a negative and marginally significant effect on GDP growth, a result consistent with the Keynesian paradox of thrift and with structural weaknesses in Uganda's financial intermediation. Gross capital formation and inflation were statistically insignificant in the long run, while the real interest rate carried the expected negative sign without reaching conventional significance. In the short run, none of the differenced explanatory variables were significant, but the error correction term was negative and highly significant, confirming rapid adjustment toward long-run equilibrium. All diagnostic tests confirmed the statistical validity of the model. The study concludes that savings mobilization alone is not sufficient to accelerate growth in Uganda and recommends that policymakers prioritize deepening financial intermediation, lowering the cost of credit, and improving the productivity of capital formation so that mobilized savings translate more effectively into output growth.