The Effect of Public Debt, Economic Activity, and Exchange Rate on Trade Performance in Uganda (1980–2023)

Abstract

This study investigates the effects of domestic debt, external debt, economic activity, and exchange rate fluctuations on Uganda’s trade performance over the period 1980–2023, using an Autoregressive Distributed Lag (ARDL) model. Inflation and interest rate are controlled for to account for macroeconomic stability factors that could otherwise distort the relationship. A quantitative time-series approach was employed to capture both short-run fluctuations and long-run trends, allowing for the assessment of dynamic interactions among the variables. Annual data were sourced from the World Bank’s World Development Indicators (trade performance, external debt, GDP), Mohamud Ali Abdi (2021) (domestic debt and interest rates), IndexMundi (2024) (exchange rate), and WorldData.info (2024) (inflation). The ARDL model was statistically significant at the 5% level (Prob > F = 0.0204), with an R-squared of 0.3827 and an adjusted R-squared of 0.2476, indicating moderate explanatory power. Domestic debt positively and marginally significantly influenced trade, with a 1% increase associated with a 0.96% rise in trade performance, reflecting the potential of domestically mobilized resources to support trade-enhancing investments. External debt and GDP growth showed no significant effect, suggesting limited short- or long-term influence on trade, while exchange rate depreciation negatively and significantly affected trade, with a 1% depreciation reducing trade performance by 0.205%. Model diagnostics confirmed stability, normality, absence of autocorrelation, and homoscedasticity, supporting the robustness of the estimates. The findings underscore the need for efficient management of domestic debt, promotion of growth in tradeable sectors, diversification of exports, and exchange rate stabilization to strengthen sustainable trade performance in Uganda.