The Effect of Budget Support on Private Sector Credit in Malawi

Abstract: In order to study the impact of budget support disbursement on credit to the private sector in Malawi, I use an error correction framework and apply it to monthly data. I first identify a cointegrating vector including real Private Sector Credit, real GDP, the Interest Rate Spread and the real Treasury Bill rate. I then specify the model based on observations from 2002 to 2014, in which the error correction term is found statistically significant suggesting that the real Treasury bill rate have a significant negative impact on credit to the private sector. The results also show that there is a crowding out effect caused by government borrowing. Adding budget support to the error correction models shows the significance of the cointegration vector, and find that has a statistically significant negative impact on credit to the private sector in Malawi.