External Debt and Ugandan Economy: A Vector Error Correction Mechanism

This study investigated the impact of external debt on Uganda’s economic growth, utilizing a time series dataset covering 1986-2022.The dataset employed in this study was obtained from the World Bank Development Indicators. A Vector Error Correction Mechanism (VECM) was used as the econometric framework to model the relationships examined in this research. The VECM estimates indicated that external debt has an insignificant impact on economic growth at a 5% significance level. Conversely, public capital investment and exchange rates exhibited significant, and indirectly related to economic growth. The findings suggest that external borrowing has not contributed significantly to Uganda’s economic growth. Furthermore, the ineffective utilization of public capital investment has had a detrimental impact on the country’s economic growth. Additionally, the real depreciation of the domestic currency was found to boost exports, leading to an increase in aggregate output. Moreover, the study revealed a significant positive relationship between trade openness and economic growth, suggesting that trade liberalization has contributed to increase in aggregate output. The study’s findings lead to the conclusion that Uganda’s economic growth has been hindered by the inefficient use of external loans for public investment purposes. Accordingly, policymakers are advised to prioritize the allocation of foreign loans towards productive capital investments and the development of physical infrastructure, with the aim of stimulating aggregate output and promoting economic growth in Uganda.