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Financial development and economic growth in Uganda: A multivariate causal linkage

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  • Odhiambo, Nicholas M
  • Nyasha, Sheilla

Abstract

In this study, we have explored the dynamic causal relationship between financial development and economic growth in Uganda during the period from 1980 to 2015. Although the finance-growth nexus debate had been raging for decades, Uganda, just as many other low-income sub-Saharan African countries, has not yet received adequate coverage on the subject. To eliminate the variable-omission-bias associated with some previous studies, two intermittent variables namely, savings and inflation, have been included alongside financial development and economic growth in a multivariate Granger-causality setting. In addition, five proxies of financial sector development have been used in the current study, namely money supply, deposit money bank assets as a percentage of bank assets, liquid liabilities to GDP, private credit by deposit money banks to GD, and bank deposits to GDP. Using the ARDL approach, the findings of the study reveal that the direction of causality between financial development and economic growth in Uganda is not clear-cut. It varies from one model to the other, depending on the proxy used for financial development. When financial development is proxied by liquid liabilities to GDP and bank deposits to GDP, a unidirectional causality from financial development to economic growth is found to prevail. When deposit money bank assets to bank assets ratio is considered a proxy of financial development, a bi-directional causality between financial development and economic growth is found to predominate. Finally, when money supply and private credit by deposit money banks to GDP proxies are used, no causality is found to exist between financial development and economic growth in either direction. Based on these results, it is recommended that when drafting policies aimed at boosting economic growth, policymakers should target growth-led financial development proxies as policy implementation outcome may vary depending on the targeted financial development proxy.

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  • Odhiambo, Nicholas M & Nyasha, Sheilla, 2019. "Financial development and economic growth in Uganda: A multivariate causal linkage," Working Papers 25711, University of South Africa, Department of Economics.
    • Handle: RePEc:uza:wpaper:25711
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    Keywords

    Financial Development; Economic Growth; Uganda; Granger-Causality;
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