A time series analysis of the effect of government domestic borrowing on private sector credit in Uganda

Abstract

This study was undertaken with the aim of assessing the effect of government domestic borrowing on private sector credit in a case study of Uganda. Secondary data was collected from Bank of Uganda financial statements and statistical abstracts from 2010 to 2017. Augmented dickey fuller test, Cumulative Period gram, White noise test and normality tests among others were used. The results from our study show treasury bills, treasury bonds, lending rates, stock of deposits affect private sector credit. Short term government borrowings (treasury bills) have a negative relationship on private sector credit while treasury bonds, lending rates and stock of deposits have a positive relationship with private sector credit. Higher interest rates make lending to the private sector more lucrative due to the higher gains anticipated. A higher stock of deposits increases the pool of funds from which banks can get money to lend to the private sector. The study recommends that banks should promote measures aimed at increasing stock of deposits. This could be through increasing interest rates or designing packages that can attract more and more deposits. Government should do more of long-term borrowing (treasury bonds) than short term (treasury bills). This will increase the amount of private sector credit available since treasury bills reduce private sector credit while treasury bonds do increase the amount of private sector credit. Monetary authorities should ensure a lucrative interest rate is provided so that the private sector can have access to more credit.