Interest Rate, Private Sector Investments, Exchange Rate and Economic Growth in Uganda (1984-2015)

ABSTRACT The overall objective of the study was to investigate the relationship between exchange rate and economic growth of Uganda (1984 -2015). The objectives included to determine the relationship between interest rate and economic growth of Uganda, to establish the relationship between private sector investments and economic growth of Uganda and to establish if there is a significant relationship between exchange rate and economic growth in Uganda in the years (1984-2015). The study was conducted based on the correlation design and the use of quantitative techniques to analyze secondary data scientifically to critically conclude the research objectives, secondary data was collected from World Bank reports, international monetary fund data sheets among others. The data was attained for the period of time of 1984-2015. The study on the first objective reveal that interest rates had a low percentage change in the dependent variable (i.e economic growth rate) is caused by interest rates. The second objective reveal the regression coefficient reveal that Private sector investments had a low change in the dependent variable (i.e economic growth rate). The exchange rate had a significant effect on the economic growth of Uganda. The study conclude that interest rate changes have had a positive change in economic growth of Uganda implying that the interest rates improvements will enhance the growth of the economy. The second research objective reveal that Private sector investments in Uganda had some effect on the economic growth of Uganda, meaning that because Private sector is the engine for the country economic growth, the effect on growth was high, therefore the study conclude that private sector investments need improvements. On the third research objective, the study concludes that exchange rate had an effect on the economic growth of Uganda. The study findings therefore imply that there is need to strengthen the exchange rate to attain economic growth in the country. The study recommends the policy makers ought to adopt strategic and systematic ways of controlling and adjusting the interest rate since their impact on the overall level of economic growth can easily be felt. However, these should be adjusted with an informed perspective since they can crowd out domestic growth. The researcher recommend for the establishment of a strong finance mechanism that will improve the state of functional of interest rates through establishing a strong policy framework that can guide the execution of the duties of financial system controls in Uganda. There recommend that fiscal and monetary strategies for stimulating private investment like offering tax holidays to prospective investors would be a better option for encouraging private sector investments in the country. Exchange rate seem to be significant to economic growth of Uganda and the need for creation of a strong export base that can generate more foreign exchange to attain the economic growth of the country.

TABLE OF CONTENTS

DECLARATION.................................................................................................................................. i

APPROVAL....................................................................................................................................... ii

DEDICATION.................................................................................................................................. iii

ACKNOWLEDGEMENT .....................................................................................................................iv

ABSTRACT .......................................................................................................................................ix

CHAPTER ONE..................................................................................................................................1

INTRODUCTION...............................................................................................................................1

1.0Introduction.............................................................................................................................1

1.1 Background of the Study........................................................................................................1

1.1.1 Historical Perspective ..........................................................................................................1

1.1.2 Theoretical Perspective .......................................................................................................4

1.1.3 Conceptual Perspective.......................................................................................................5

1.1.4 Contextual Perspective........................................................................................................7

1.2 Problem Statement...............................................................................................................10

1.3 Purpose of the Study............................................................................................................10

1.4 Specific Objectives ...............................................................................................................11

1.5 Research Questions..............................................................................................................11

1.6. Hypothesis...........................................................................................................................11

1.7 Scope of the Study...............................................................................................................11

17.1 Content Scope....................................................................................................................11

1.7.2 Time Scope........................................................................................................................11

1.8 Significance of the Study......................................................................................................12

1.9 Operational Definitions of Key Terms ..................................................................................12

CHAPTER TWO...............................................................................................................................14

LITERATURE REVIEW ....................................................................................................................14

2.0 Introduction..........................................................................................................................14

2.2 Theoretical Review...............................................................................................................14

2.2 Conceptual Framework...............................................................Error! Bookmark not defined.

2.3 Effect of interest rates on economic growth .......................................................................16

2.4 Effect of Private sector investments on economic growth ..................................................18

2.5 Effect of exchange rate on economic growth ......................................................................20

CHAPTER THREE............................................................................................................................25

METHODOLGY................................................................................................................................25

3.0 Introduction..........................................................................................................................25

3.1 Research Design...................................................................................................................25

3.2 The Model Specification .......................................................................................................25

3.3 Variable definition and Measurements.................................................................................26

3.4 Data types and Sources .......................................................................................................27

3.5 Methods of data analysis......................................................................................................27

3.5.1 Descriptive Analysis ...........................................................................................................27

The Augmented Dickey-Fuller Tests ..........................................................................................28

3.5.4 Diagnostic Tests................................................................................................................29

Serial Correlation Test................................................................................................................29

Normality Test............................................................................................................................29

CHAPTER FOUR:.............................................................................................................................31

PRESENTATION, INTERPRETATION AND ANALYSIS OF THE DATA............................................31

4.0 Introduction..........................................................................................................................31

4.1 Descriptive Statistics ............................................................................................................31

4.1.2 Time Series Property of Data (Stationarity tests).............................................................33

4.2 Interest rate and economic growth of Uganda from 1984-2015........................................38

4.2.1 Correlation analysis between Interest rate and economic growth...................................39

4.2.2 Diagnostics tests on Regression of Interest rates and economic growth ........................37

4.2.3 Diagnostic Tests for Normality ..........................................................................................40

4.2.4 The Jarque-Bera Test for Normality..................................................................................40

4.3 Private sector investments and economic growth of Uganda (1984-2015).. Error! Bookmark 

not defined.

4.3.1 Correlation analysis between Private sector Investments and economic growth of 

Uganda..............................................................................................Error! Bookmark not defined.

4.3.2 Diagnostic Tests of regression ................................................Error! Bookmark not defined.

4.3.3 Diagnostic Tests for Normality ................................................Error! Bookmark not defined.

4.2.3 The Jarque-Bera Test for Normality........................................Error! Bookmark not defined.

4.4 Exchange rate and economic growth in Uganda in the years (1984-2015). Error! Bookmark 

not defined.

4.4.1 Relationship between exchange rate and economic growth in Uganda in the years 

(1984-2015)......................................................................................Error! Bookmark not defined.

4.4.3 Diagnostic Tests for Normality ................................................Error! Bookmark not defined.

4.4.3 The Jarque-Bera Test for Normality........................................Error! Bookmark not defined.

CHAPTER FIVE................................................................................................................................41

DISCUSSION OF FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS....................................41

5.0 Introduction..............................................................................................................................41

5.1 Discussion of Findings ..............................................................................................................41

5.2 Conclusions...........................................................................................................................43

5.3 Recommendations................................................................................................................44

5.4 Contributions to existing Knowledge ...................................................................................45

5.5 Areas for Further Research..................................................................................................45

References......................................................................................................................................46

Appendix i: Data for Analysis .........................................................................................................51

IMF World Economic Outlook (WEO), World Bank 2016..............................................51