The Impact of External Debt on Uganda’s Economic Growth

Abstract

This study examined the impact of external debt on Uganda‟s economic growth over the period 1987-2017 using the Autoregressive Distributed-lagged (ARDL) model estimation techniques after carrying out diagnostic tests on the data. The analysis of unit root was performed on each of the variables incorporated in the model and the result showed that all the variables except lending interest rates were not stationary at level but achieved stationary after first difference at 5% level of significance. This research was prompted by the fact that in the recent past, Uganda‟s debt has increased significantly which could cause economic challenges if it‟s not prudently managed. As at June 2017, the country‟s public debt was estimated at USD 9.4 billion an increase from USD 8.4 billion in June 2016. Results of the study showed that in the long run, external debt had a significantly negative effect on economic growth while debt service had a positive effect on economic growth. Other variables in the model included exports which had a positive relationship with economic growth. However, the macroeconomic factor of real interest rate and the dummy variable controlling for the debt relief that was given to Uganda did not have a significant effect on economic growth. Based on these findings, it is evident that Uganda‟s economic growth was curtailed by its external debt levels and Uganda should therefore adopt prudent management of its external debt by borrowing for only very high priority well appraised and self-liquidating projects if it is to realize benefits out of external borrowing as stated by some theories.