Effect of monetary policy on private investment in Uganda

Abstract

This study investigated the effect of monetary policy on private investment in Uganda using annual data for the period 1986 to 2022. The main approach used was the Autoregressive Distributed Lag (ARDL) to test for both the long and short-run relationship between the variables. In the long run, money supply had a positive and statistically significant effect on private investment, as evidenced by a coefficient of 25.583 (p = 0.046). In contrast, the bank rate demonstrates a significant negative influence, with a coefficient of -0.510 (p = 0.004). Additionally, domestic credit to the private sector is identified as a key determinant of private investment, with a positive coefficient of 1.935 (p = 0.000). In the short term, the second lag of private investment shows a significant negative relationship (coefficient = -1.543, p = 0.024). Conversely, the GDP growth rate (p = 0.018) and imports (p = 0.002) revealed strong positive correlations with private investment, indicating their supportive influences. Furthermore, the Error Correction Term (CointEq (-1)), correctly signed and significant, indicates that private investment adjusts toward its long-term equilibrium at a rate of 65.2% annually, highlighting the important role of monetary policy in shaping private investment trends over time. To enhance private investment in Uganda, policymakers should responsibly increase the money supply, lower bank rates to reduce borrowing costs, and improve domestic credit availability for businesses, particularly small and medium-sized enterprises (SMEs), through incentives and favourable lending terms.