PRIVATE SECTOR BANK CREDIT, FINANCIAL DEEPENING AND ECONOMIC GROWTH IN UGANDA: AUTOREGRESSIVE DISTRIBUTED LAG

Abstract

This study evaluated the short run relationships among private sector bank credit, monetary depth, inflation and real output in Uganda from 1994 to 2025 and tested whether the variables shared a stable long run relationship. Annual data from the World Development Indicators were analysed using descriptive statistics, Augmented Dickey–Fuller (ADF) unit root tests and autoregressive distributed lag (ARDL) bounds testing. The Akaike information criterion selected an ARDL model with lag order (2,2,2,2). The bounds test F statistic of 1.684 was below the 5 per cent lower and upper critical values of 4.01 and 5.07, so no stable long run cointegrating relationship was established. In the short run, private sector credit was positively associated with real output in the current year (β = 0.0180, p = 0.005) and after one year (β = 0.0140, p = 0.044). In these results, β denotes the estimated regression coefficient and p denotes the probability value used to assess statistical significance. Broad money had negative conditional associations in the current year (β = −0.0090, p = 0.024) and after one year (β = −0.0075, p = 0.035). Current inflation was insignificant (β = −0.0010, p = 0.458), while lagged inflation was negative and significant (β = −0.0019, p =0.045). The findings indicate that the relationship between finance and output depends not only on monetary depth but also on the extent to which banks channel funds to private borrowers. Uganda should thus strengthen credit information, collateral systems and access to affordable long-term finance, while directing greater attention to productive sector lending.