Effect of illicit financial flows on Uganda’s economic growth (1980-2015)

Abstract

The study examined the effect of illicit financial flows on Uganda’s economic growth for the period 1980-2015. The study employed the Ordinary Least Square(OLS), co-integration approach and Vector Error Correction Model (VECM) to establsh the long-run, short-run and causal relationship between illicit financial flows and Uganda’s economic growth.

The results reveal a positive long run and short run relationship between illicit financial flows and Uganda’s economic growth, just as the causality test. This is indicated by the error correction coefficient of -0.618 with a 5 percent level of significance which implies that 62 percent of this disequilibrium is corrected within one year. This therefore means that a one percentage point increase in illicit financial flows leads to about 2.58 percent and 1.314 percent increase in economic growth in long run and short run respectively keeping other factors constant. The positive effect observed in this study is connected to the fact that part of the illicit financial flows were used for importation of industrial or capital goods, which are then used domestically in the process of production.

The policy implication is that long run efforts to spur Uganda’s economic growth should focus on regulating goods that are imported into the country, especially luxury goods and other items that can be produced locally, to avoid wastage of the foreign reserves, which could have been directed towards importation of industrial goods to help create more jobs and boost economic growth.