Impact of macroeconomic factors on economic growth in Uganda (2001-2021)

Abstract

The purpose of the study was to examine innate bearing of changes in the macroeconomic factors on the economic growth in Uganda between 2001 to 2021. It examined the bearing of two macroeconomic factors including; foreign exchange rate and interest rate, on the economic growth with secondary data from Bank of Uganda, UBOS, MoFPED and World Bank. The study is motivated by the deficiency of recent research in this area of study in sub Saharan Africa such as Uganda after slowdown of economy due to pandemic Saharan Africa although findings on major developed countries indicate a relationship between the macroeconomic factors and economic growth. Synthesizing the flexible Price Model, this study built and tested theoretical models linking macroeconomic factors and economic growth. The models take account of the effect of interest rate, exchange rate which is a serious gap in literature pertaining macroeconomic factors and economic growth in Uganda. Drawing on (Kartaev, 2017) the study argues that research on the effect of macroeconomic factors on economic growth should cover as many factors as possible to reach reliable conclusions. The study’s major contribution is the localization of research findings on how movements in macroeconomic factors affect economic growth. It was not possible for the study to manipulate the independent variables and so, a non-experimental research design was employed using a hypothesis testing approach to quantitative data. The neoclassical aggregate production function is used as the methodology to analyze the relationship between selected macro-economic factors and growth. The Johansen Maximum Likelihood approach is used to test for long-run relationship between the dependent and independent variables. Theoretical models were tested using Pearson’s Correlation Coefficients, and hierarchical multiple regression. The results indicated significant positive relationships between economic growth and each of the independent variables foreign exchange rate, and interest rate implying that when the Uganda shilling depreciates against the US dollar or when interest rates increase, the economic growth will increase and vice versa. The government should formulate a policy to increase in the amount of money made available to borrowers through increases the supply of credit as well imposing restriction on purchases and sale of currencies to create exchange rate volatility to support production and ultimately GDP.