DOMESTIC INVESTMENT AND ECONOMIC GROWTH IN UGANDA: A TIME SERIES ANALYSIS (1985 – 2023).
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Date
2023-09-22
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Gulu University
Abstract
This study examines the impact of domestic investment on economic growth in Uganda, focusing
on the roles of public sector investment (PSI), private sector investment (PrSI), and the moderating
effects of monetary policy variables, namely the interest rate (IR) and the exchange rate (EXR).
The study is motivated by the persistent inconsistency between rising investment levels and
fluctuating economic growth in Uganda, raising concerns about the effectiveness and efficiency of
investment in driving sustainable development. Using annual time-series data for 1985–2023,
sourced from the World Development Indicators (World Bank) and the Bank of Uganda, the study
employed the Autoregressive Distributed Lag (ARDL) modeling approach with secondary
quantitative data. This method is suitable given the mixed order of integration among variables
and its ability to capture both short-run dynamics and long-run equilibrium relationships. The
analysis was conducted using Stata (version 15). The empirical findings show a statistically
significant long-run relationship among economic growth, public investment, and private
investment. The results indicate that private sector investment has a positive and statistically
significant effect on economic growth in both the short run and the long run, highlighting its critical
role as a driver of economic performance. While the public sector plays a supportive role, the
results show that monetary policy variables exert varying influences on economic growth. Interest
rates have a negative effect, consistent with theoretical expectations that higher borrowing costs
discourage investment, while the exchange rate demonstrates a weak and statistically insignificant
impact. The error correction mechanism confirms a stable adjustment process, although the speed
of adjustment to long-run equilibrium is relatively slow, indicating structural rigidities in the
economy.
The study concludes that the private sector is the dominant contributor to economic growth in
Uganda, while the effectiveness of public investment remains limited. The study’s policy
recommendation recommends policies aimed at enhancing investment in the private sector,
improving the efficiency and allocation of public investment, and maintaining a stable
macroeconomic environment to support sustainable growth. The study contributes to the existing
knowledge by providing Uganda empirical evidence using econometric model and differentiating
between private and public impacts to economic growth.
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