The Macroeconomic Determinants of Economic Growth in Uganda (1990–2019)

Abstract

The study was based on Macroeconomic Determinants of Economic Growth in Uganda using cointegration approach. The researcher used statistical software of Eviews 11 student version for the analysis of the macroeconomic variables affecting Uganda’s economic growth. The main objective of this study was to examine the major macroeconomic determinants of economic growth in Uganda between the periods 1990 and 2019 applying the Johansen method of cointegration. All the variables are integrated at first order except real effective exchange rate as a result the Johansen's cointegration approach was used. The study found out that foreign direct investment (% of GDP), inflation (consumer prices) and real interest rate had a positive effect on growth in real gross domestic product per capita while real effective exchange rate has a negative effect on per capita growth in gross domestic product. In the long run, real effective exchange rate and real interest rate are the significant determinants of growth in real gross domestic product per capita in Uganda. In the short run, inflation (consumer prices) and real interest rate turned to be statistically significant determinants of growth in real gross domestic product per capita. Based on the findings, the following policy recommendations are made: The Bank of Uganda should make use of monetary policy to stimulate the economy through increased aggregate demand due to the positive relationship between inflation and gross domestic product per capita growth. Since there is a positive relationship between FDI and gross domestic product per capita growth, it is therefore recommendable that the government of Uganda continues to attract more international capital inflow through trade liberalization if it is to achieve its growth target of 8 percent growth rate per annum. However the most important policy implication from the findings of negative relationship between economic growth and exchange rate indicates that there is a need for exchange rate policy framework that compliments the existing inflation targeting regime in Uganda. Instead of completely liberalizing the exchange rate in the framework of inflation targeting strategy adopted, policymakers in Uganda have to prevent the upside movements in the exchange rate by taking into consideration its negative effect on economic growth.