Impact of public borrowing on private investment: a case study of Uganda, 1980 – 2023

Abstract

Public Investment Finance is of great importance as the government seeks to strike a balance between the fiscal space and meeting government expenditures. The recent catastrophes that affected economies that were greatly supporting low-income Countries like Uganda have further exacerbated the need to borrow funds locally which is sought to be disastrous to the economy as it crowds out resources for private investment. This study sought to examine the impact of public borrowing on private investment employing time series data for the period 1980 – 2023. The study employed the Auto Regressive Distribution Lag (ARDL) model to estimate the long-run and short-run regression relationship of the independent variables on the dependent variable (private investment). From the ARDL model, it is estimated that the speed of adjustment was estimated at 54.9 per cent. The key variable of interest of the public borrowing was observed that in the short run and long run there was a negative and significant relationship with gross capital formation which was used to estimate private investment. In the long run, a 1 per cent increase in public debt reduced private investment by 0.183 per cent, this is significant at 1 per cent. Similarly in the short run, a 1 percent increase in public debt increased private investment by 0.2 percent significant at 5 percent. This study recommended that funds borrowed to finance government budget deficits should be invested wisely to achieve a positive public good as it can cripple private investment if not used according to purpose. The study also recommended further investigations into the domestic borrowing and private-sector investment phenomenon.