Financial credit allocation and sectoral economic growth nexus in Uganda: evidence from panel data analysis

Abstract

This study examined the nexus between financial credit allocation by Other Depository Corporations (ODCs) and sectoral economic growth in Uganda, using data from 10 economic sectors for financial years of 2010/11 Quarter 1 to 2023/24 Quarter 4. Employing the Dumitrescu Hurlin granger causality and the Panel ARDL method. The results revealed that total lending by commercial banks strongly granger causes sectoral economic growth at 1% significance level, and micro-deposit-taking institutions credit also granger-causes sectoral economic growth at 5% level of significance, while credit institutions’ total lending showed no granger-causal effect. In the long run, total lending by commercial banks exerted a significant positive effect on sectoral economic growth with a 1% increase in commercial banks’ credit is associated with 0.38% in sectoral GDP, credit from micro-deposit-taking institutions, also had significant positive effect with a 1% increase associated with 0.123% increase on sectoral GDP. Conversely, credit from ODCs’ credit showed no significant long-run effect. However, overall, none of the ODCs’ credit had significant effect on sectoral GDP. For specific sectors, in the short run, there were significant disparities in the effects of credit across sectors. Credit from commercial banks demonstrates the positive effect particularly on trade and a negative effect on transport and communication sector while Credit from micro-deposit taking institutions also showed positive significant effect on Agriculture, Community & Social Services, and Electricity & Water, however ODCs’ credit from didn’t show short run significance. Macroeconomic variables, particularly high lending rates and inflation constrain the effectiveness of credit, yet currency depreciation enhances sectoral growth, underscoring the need for stable economic policies. The study recommends strengthening commercial bank and micro-deposit-taking institution lending to productive sectors, enhancing credit allocation efficiency. Subject Keywords; Financial credit, Economic growth, Uganda