Inflation Thresholds, Economic Growth and Investment Planning In Uganda

Abstract

Economic Planners, monetary policy custodians and civil society in Uganda often disagree on the target for inflation when their development objectives are not harmonised. When development economists argue for increased deficit spending in support of infrastructure development and capital accumulation, they are challenged in regards how much pressure the development budget should put on likely macroeconomic stability, particularly where inflation could rise above the inflation target. This paper examined the effect of inflation on economic growth in Uganda and evaluates the equilibrium rate of inflation in the country, given the macroeconomic environment.

Using the threshold model and data for the period 1991-2017 it is established that: a) below 7.3 percent inflation level, the relationship between inflation and economic growth is positive and inflation is not harmful to growth, while at levels above 7.3 percent, inflation was detrimental to economic growth and the relationship become negative; b) at economic growth rates above 7.8 percent, inflation was an incentive for further growth, yet at economic growth rates below 7.8 percent per annum, increases in inflation served as a dis-incentive to economic growth. Therefore Uganda in the current conditions is better off maintaining inflation below 7.3 percent as long as the anticipated economic growth is 7.8 percent.