Economic determinants of agricultural sector credit in Uganda

Abstract

This study strived to identify the economic factors that determine the agricultural sector credit in Uganda for monthly period of June 2008 to August 2019. Using ordinary least squares (OLS) econometric methods, the dependent variable was agricultural sector credit. The independent variables were lending interest rates, exchange rates, and consumer price index (CPI). These variables, except the lending interest rate, were transformed into natural logarithm to ensure linearity. This helps to interpret the model coefficients as percentage changes. However, in estimating the empirical model, lagged dependent variable and monthly dummy variables were included. This was necessary to deal with the challenges of autocorrelation which are so prevalent in time series data. And also, a lagged dependent variable improves on the overall fit of the model while at the same time accounting for auto correlation. Monthly dummy variables were included to account for seasonality in agricultural sector performance. The key results are as follows. The lagged agricultural credit variable is positive highly statistically significantly different from zero, showing a very high level of persistence in agricultural credit growth. Lending rates have a negative impact on agricultural sector credit growth, which is significant at the 5 percent level, showing that high interest rates are a constraint to agricultural sector credit in Uganda. The coefficient of the exchange rate variable displays no significant relation to agriculture sector credit even though it bears the expected sign. Results also show that there is a significant positive relationship between CPI and agriculture sector credit. Basing on the findings and the various literatures, there is a need by the government to ensure that lending interest rates are maintained and remain favorable to farmers in Uganda. This calls for the implementation of favorable economic policies that not only lead to increase in awareness of agricultural credit services but also maintaining the favorable economic determinant of agriculture credit discussed.