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