Effects of Foreign Aid Inflow on Economic Growth of Uganda: Autoregressive Distributed Lag Modelling (ARDL)

Uganda has always relied on foreign assistance to enhance its economic development and has been a recipient of foreign assistance from individual countries and from multilateral organizations. The study aims at establishing the effects of foreign aid on the economic growth of Uganda. It used annual time series data for the period 1970-2017. The hypothesis that foreign aid can promote growth was explored. This hypothesis was tested using time series data for foreign aid. An empirical model is estimated using the Autoregressive Distributed Lag (ARDL) approach to cointegration proposed by Pesaran and Shin [59]. Results show that foreign aid inflow significantly reduced economic growth in Uganda in the short run and long run. The domestic investment was significant and had a positive sign in the short run while exports increased output in the short and long run. Dummy variable for insecurity increase output in the short run and increased it in the long run. The study identified previous periods of democracy index and effective labor to have negatively affected output in the short run. In the long run, effective Labour force, exports, Dummy variable for insecurity and democratic index was found to increase output in the long run. This study contributes to the literature on foreign aid and economic growth by providing the theoretical and empirical evidence for Uganda.