Abstract:
The study examines the interrelationships between financial development, economic
growth, capital accumulation and productivity growth in Botswana over the period
1980-2014. Using the Autoregressive Distributed Lag (ARDL) bound test technique,
we find that financial development, measured by private credit, has a negative and
significant impact on economic growth both in the long and short run. In contrast, we
observe that financial development, measured by liquid liabilities, has a positive and
significant impact on economic growth in the short run. Furthermore, the empirical
results show that the interrelationship between FD (private credit) and economic
growth support the supply leading hypothesis while the interrelationships between FD
(liquid liabilities) and economic growth support the demand-following hypothesis. On
a positive note, the empirical evidence also suggests that financial development (private
credit) leads to higher output level in Botswana through promoting the accumulation
of assets. Thus, for financial development to promote economic growth through both
the accumulation of capital and productivity growth, it is useful to further develop
Botswana’s financial market. Efficient financial institutions may encourage innovation
by mobilising resources to finance promising investment projects, evaluating prospective
entrepreneurs and allowing investors to diversify the risks related to uncertain innovative
activities. It is also crucial to improve the investment environment in Botswana which
will encourage lending activities by the financial sector, especially towards the business
sector. Furthermore, if diversification of the Botswana economy continues, we can
expect the financial development to play a more prominent role in the country’s overall
economic performance in the future.
