Financial Development and Economic Growth in Botswana

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.