Effect of Real Interest Rate on Domestic Private Investment in Uganda: Evidence from Ardl Bounds Testing Approach to Cointegration

Abstract Real interest rates are believed to have a significant influence on domestic private investment. In recent years, few studies have examined the impact of real interest rates on domestic private investment, despite their crucial role in promoting growth in this area. Focusing on Uganda, this paper is the first to investigate the impact of real interest rates on the growth of domestic private investment. The primary objective is to empirically examine the impact of real interest rates on domestic private investment in Uganda from 1983 to 2022. The Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration was employed to analyze the data. Findings suggest a long-term relationship between domestic private investment and real interest rates, as well as other factors. Specifically, the results indicate that real interest rates have a positive impact on domestic private investment in the long run, at a 1% significance level. Additionally, the analysis shows that real GDP growth, general government final consumption expenditure, external debt, gross national expenditure, money supply, trade openness, and gross national savings collectively determine domestic private investment in Uganda. Based on the empirical results, policies aimed at stabilizing real interest rates by implementing favorable strategies that promote economic activities and encourage private investment in the country are highly recommended. Therefore, policies such as creating an enabling business environment through the provision of supportive economic infrastructure related to low power tariffs, improved road networks, and increased business confidence as well as honouring the rule of law and ensuring solid macroeconomic management through low inflation rates and a stable exchange rate, can help facilitate domestic private investment in Uganda.