The impact of domestic credit on Uganda’s export performance

Abstract

Uganda has made considerable efforts to promote trade and expand its integration into the global economy; however, the country continues to struggle with a persistent trade deficit, raising concerns about the effectiveness of domestic financial resources in fostering export growth. The motivation for this study, therefore, emerged from the need to examine how domestic credit, particularly credit extended to the private sector, contributes to enhancing export performance, given the central role that access to finance plays in stimulating productive investment. Quantitative research design was employed in this study. The time series data for the period 1960 to 2023 were considered in this study. This data was downloaded from the World Bank development indicator file of the World Bank. The study was guided by the export-led growth model, which suggests that every country’s economic growth is primarily driven by the expansion of its export sector, an idea that gained empirical support through the rapid development observed in East Asian economies such as South Korea, Taiwan, Hong Kong, and Singapore. This study performed the analysis at three levels. Descriptive statistics and normality tests were performed. Also, a pairwise correlation and the variance-covariance matrix plot were estimated. Lastly, the multivariable level comprised the estimation of the VECM model. Before model estimation, the study examined unit root tests, cointegration, and Granger Causality to inform model selection. The findings show that while domestic credit, GDP, and exchange rate appear positively correlated with export performance, the VECM model indicates otherwise. A 1% increase in domestic credit to the private sector reduces exports by about 2%, whereas a higher exchange rate enhances exports by strengthening the Ugandan currency. Additionally, because agriculture contributes 24% of GDP, further GDP growth is linked to slower export performance. The study recommends targeted credit allocation and incentives to promote export participation. Keywords; Domestic credit, Uganda’s export performance