Domestic Debt and Growth of Credit To the Private Sector in Uganda

This study examines the effect of domestic debt on credit to the private sector, causality, and structural breaks in credit available for the private sector. Using the Auto Regressive Distributive Lag (ARDL) approach and two-step Granger causality test, evidence shows that domestic debt is negatively related to credit to the private sector in the short run as well as the long run. The study also finds a one-way Granger causality from private sector growth in credit to domestic debt, and it further reveals that the structural break variable significantly impacts credit to the private sector. The results indicate that, in the short run, private sector credit growth is positively influenced by its performance during the previous two quarters in that greater expansion of private lending during the previous quarters leads to greater private sector credit growth during the current period. Specifically, a one percent increase in Corporate credit in the most rerise in commercial cent past quarter increases current growth by 0.42 percentage points and by 0.2 percentage points for the second most recent quarter, while other variables are held constant. The study advises the government to monitor the amount of bank capital tied up in long-term government securities and avoid rapid policy reversals. Commercial banks should be cautious against over-investing in long-term government securities because rising domestic debt and declining growth in credit to the private sector can impose pressure on liquidity, and hence internal discipline on lending to government securities makes sense.