The impact of financial development on gross domestic product growth in Uganda (1983 – 2019)

Abstract

This study investigates empirically the causal relationship between financial development and economic growth in Uganda. This study has three main objectives which include; to determine the relationship between financial development and GDP growth in Uganda; to determine the short-run effect of financial development and GDP growth, to determine the long run effect of financial development and GDP growth and to determine the direction of causality between financial development and economic growth. The aim of this study is to provide the policy makers and the research community with knowledge of the relationship between financial development and economic growth. Unlike many previous studies, the study uses three proxies of financial development against GDP growth (a proxy for economic growth). The three proxies for financial development include Broad money (M2) as a percentage of GDP, Domestic credit to the private sector as a percentage of GDP and Bank deposits as a percentage of GDP. This study used time series data from the period 1983 to 2019. This study investigates the relationship and causal link between financial development and economic growth in Uganda by employing the Engle and Granger -integration test and used the Vector Error Correction model (VECM) as a technique of estimation the results indicate the existence of no short-run relationship between financial development and economic growth, bank deposits continues to exert a negative effect even in short run and broad money (M2) is insignificant in short run. The co-integration test show that there is a long-run relationship between all the indicators of financial development and economic growth. In addition, there is a one way causality relationship between financial development and economic growth in Uganda in both the short-run and the long-run. It is therefore proposed that the financial reforms in Uganda should be pushed forward in order to boost the development of the financial sector thus an increase in its role on economic growth. Keywords: Financial development, Economic growth, financial intermediation, Endogenous growth.