Financial development and economic growth in Botswana: new evidence from disaggregated data

Abstract

In this study, the causal relationship between financial development and economic growth in Botswana is re-examined using disaggregated data from 1980 to 2020 on financial development. The importance of financial development and economic growth in achieving Sustainable Development Goals (SDGs) cannot be overemphasised. Between economic growth and financial development, the ability to influence the right variable allows policy makers in Botswana to achieve the desired economic growth levels that make achieving SDGs possible. Financial development is measured at an aggregate level by the Financial Development Index (FDI) and at a disaggregate level by the Financial Institution Index (FII) and Financial Market Index (FMI) from the International Monetary Fund (IMF) financial development index database. Using the Autoregressive Distributed Lag (ARDL) approach to cointegration and ECM-based causality, the study found no distinct causal flow between economic growth and financial development. The study did find an indirect causal flow from economic growth to financial development through the gross fixed capital formation link, thereby confirming the financial demand hypothesis. This finding points to the importance for Botswana to continue with the Vision 2036 and the National Development Plans that focus, among other goals, on economic growth, to realise an increase in gross fixed capital formation and financial development.