Effects of public debt on private investment in Sub–Saharan Africa: Empirical evidence on the uneven effects in Uganda

In this study we analyzed the uneven effects of public debt on private investment, providing evidence from a typically developing economy, Uganda. Uganda’s public debt has been increasing, raising the question of whether excessive domestic and external borrowing hurts private investment, the engine of growth, and the sector required to pay taxes for public debt repayment. With data from 1990 to 2022, linear and non-linear autoregressive distributed lag (NARDL) estimation approaches are utilized. The estimation results show that private investment is affected by increasing public borrowing, although the effects are uneven. Both short- and long-term repercussions differ for domestic and overseas debts. These findings support the crowding-out effect theory in the literature. The study suggests that Uganda and other developing nations should maintain government borrowing, especially domestic borrowing, at optimal levels to avoid crowding out private investment. Otherwise, chronic borrowing will hurt private sector growth, job creation, and domestic revenue collection, and lead to unsustainable debt. Realigning borrowing towards largely productive sectors like education, health, and infrastructure as opposed to recurrent expenditure is also recommended because the former sectors attract foreign investment and boost long-term productivity, which is essential for debt repayment.