Does Finance Promote Growth In Botswana?

Abstract

The discourse on the finance-growth connection is yet to be laid to rest. This paper contributes to the discourse by analyzing data (1981-2010) from Botswana. The paper uses Fully Modified Ordinary Least Squares regression technique and Pairwise Granger Causality for analysis. The results show that when domestic credit to the private sector as a share of GDP is used to proxy financial development, there is a negative, significant relationship between financial development and economic growth in Botswana. However, when the ratio of liquid liabilities (M3) to GDP is used to measure financial development, a positive, significant relationship is found. Pairwise Granger Causality test results reveal that economic growth Granger-causes a reduction in financial development when domestic credit to GDP ratio is used to proxy financial development. On the other hand, when M3 to GDP is used to proxy financial development, finance precedes growth. The paper, therefore, argues that finance may promote growth in Botswana via the expansion of the size of the financial intermediary sector.