PUBLIC DEBT SUSTAINABILITY: ESTIMATING THE FISCAL REACTION FUNCTION FOR UGANDA (1981/82 – 2016/17)

Abstract

This study examines the sustainability of Uganda’s public debt from 1981/82 to 2016/17. The study uses the fiscal reaction function approach to find out whether the government’s reaction to the growing debt is responsive and systematic. The study uses annual secondary time series data obtained from the Ministry of Finance, Planning and Economic Development, the Bank of Uganda and the World Bank Database for World Development Indicators of 2018. The autoregressive distributed lag estimation approach is used based on the order of integration of the study variables and the presence of a long run relationship. The results show that, in the long run, the government has been able to respond to past debt build-up in a sustainable way by increasing the primary balance. However, in the short run, the government has not been responsive to the debt bulge which poses risks to debt sustainability. The study suggests that in order to guarantee future debt sustainability, the government should strengthen the primary balance by reducing wasteful expenditures through eliminating corruption, reducing fiscal slippages and supplementary budgets and curbing the creation of more administrative units which increase the funding burden of the government.