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 adopts 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 time series data obtained from the World Bank Database for World Development Indicators of 2018; the Ministry of Finance, Planning and Economic Development; and the Bank of Uganda. The autoregressive distributed lag estimation methodology is used because of the order of integration of the study variables and the presence of a long-run relationship. The results indicate that, in the long-run, the government has responded to the growing debt sustainably by increasing the primary balance. In the short-run, the government has been unresponsive to the debt bulge, therefore, posing risks to debt sustainability. The study suggests that to ensure debt sustainability, the government should, especially in the short-run, improve the primary balance by reducing wasteful expenditures through curbing the creation of more administrative units, eliminating corruption, reducing fiscal slippages, and supplementary budgets.

JEL Classification: C22; H63; E62; E62

Keywords: autoregressive distributed lag, debt sustainability, fiscal reaction function, primary balance