Empirical analysis of the effects of terms of trade on economic growth in Uganda (1993–2024)

This study examines the effect of terms of trade on economic growth in Uganda using quarterly time series data from 1993Q1 to 2024Q4 (128 observations). The specific objectives are to determine whether terms of trade Granger cause economic growth, to assess short run and long run effects, and to evaluate the influence of control variables (inflation, exchange rate, trade openness, and investment). The study employs the autoregressive distributed lag (ARDL) bounds testing approach to cointegration, complemented by Granger causality tests, diagnostic checks, and robustness analyses. The results reveal that terms of trade have a positive but marginally significant long-run effect on Uganda’s economic growth (coefficient = 0.2497, p = 0.052), significant at the 10% level . while contemporaneous short-run effects are positive and significant (ΔTOT coefficient = 0.1571, p = 0.019), with lagged effects at one quarter being insignificant. Trade openness emerges as a positive and significant determinant of growth, with a 1% point increase associated with approximately a 0.67% point increase in GDP growth in the long run. Inflation has a negative and statistically significant long-run effect on growth, while the exchange rate and investment do not exhibit significant long-run effects in the preferred specification. The error correction model indicates that approximately 49.8% of disequilibrium is corrected within one quarter. The model is stable, with residuals normally distributed and no serial correlation or heteroskedasticity. The findings suggest that while terms of trade play a moderate role in Uganda’s economic growth, trade openness and macroeconomic stability are key determinants. Policy implications include prioritising trade openness, maintaining macroeconomic stability, and promoting export diversification under the EAC and AfCFTA.