Bank Credit and Private Investments in Uganda

Abstract

This study empirically establishes the impact of bank credit to the private sector on domestic private investment in Uganda. Specifically, the study investigates other factors that affect domestic private investment in Uganda which include Inflation (INF), Nominal Exchange Rate (NER), Gross Domestic Product Growth Rate (GDPg) and Government Investment (GI). The data used in this study was collected from both the International Monetary Fund IMF and the World Bank databases. The Augmented Dickey-Fuller (ADF) (1979) was employed to test for the time-series properties of the variables used in the study both in levels and in the first difference. The results showed that there was a combination of both I(0) and I(1) variables in the model. That is, GDP growth rate and nominal exchange rate were found to be stationary at a level while private investment, bank credit, government investment, and inflation were found to be non-stationary at levels but became stationary after the first difference. And therefore, the ARDL bounds testing methodology was adopted to test for both the long-run relationship and short-run dynamics of the model. The empirical results suggest that in the long run, bank credit to the private sector, Gross Domestic Product growth rate, and government investment have positive impacts on private investment, while nominal exchange rate and inflation have negative effects on private investment. The short-run results, on the other hand, show that bank credit to the private sector, government investment, nominal exchange rate, and inflation have a negative and statistically significant effect on private investment while GDP was found not to be statistically significant in the short run. Post- estimation diagnostic tests conducted revealed that the model was free from problems of serial correlation, heteroscedasticity, and multicollinearity. In addition, the errors of the model are normally distributed and the parameters are stable as shown by the CUSUM and CUSUMsq control charts. The study recommends increased access to bank credit by the private sector, increased infrastructural development through increased government investments and a stable and predictable economic environment in order to increase private investment in Uganda.