Monday, July 26, 2021

Financial development critical to economic growth ÔÇô study

An economics researcher at the University Of Pretoria, South Africa ÔÇô Joel Hinaunye Eita, has advised that Botswana should focus on developing its financial market to bolster economic growth.
Presenting his draft paper before other academics at the 4th African Finance Journal Conference last week in Gaborone, Eita said there is evidence of a stable long-run relationship between financial development and economic growth in the country.
“Financial development causes economic growth in Botswana,” he asserted.

The paper sought to analyse a causal relationship between financial development and economic growth in the country and used data that spanned from 1976 to 2005. To reinforce the assertion that the country’s economic footsteps follow the supply led hypothesis, Eita added that impulse responses were also included in the research and they show “that real GDP per capita respond positively to shocks on financial development”.

His research findings are consistent with, amongst others, results that were obtained by other researchers in the economies of Tanzania, Tunisia and Korea.

Had Botswana woken up to his reality, the country’s economic development would have surpassed the current achievements. The biggest problem, Eita noted, was an oligopolistic market structure (a small number of producers or sellers) in the banking sector and how the then Botswana Stock Market (Botswana Stock Exchange) was conceived. Regarding the establishment of the domestic bourse in 1989, he said the government blundered by allowing overseas portfolio investment institutions to purchase shares on generous terms.

When foreign multinationals were having it easy, local institutions were on the other hand subjected to exchange control regulations of only investing up to 50 percent of their assets abroad. The exchange control measures have served as a punishment to local savers due to the fact that foreign financial assets generally offer higher real rate of return than those denominated by the domestic currency.

“Local investors were denied the opportunity to increase their wealth and diversify their risks,” he argued.

However, the government has since revisited and allows portfolio managers to invest up to 70 percent of their assets offshore. Eita further faulted the dominance of two commercial banks – Barclays Bank Botswana and Standard Chartered Bank – since the country broke ranks with Rand Monetary Area in 1976. The two banks, he noted, regressed the country’s financial sector development.

“They were not under pressure from competition or development of new sources of business and range of financial instruments,” he suggested. This then constituted structural weaknesses in the financial system. The weakness resulted from the fact that these two giant banks only concentrated on short-term segments of the market and did not offer much development to enhance long-term investment. There were limited ranges of financial instruments, capital market for equities and long-term and short-term debt instruments did not exist before government intervened through the bourse. The government, he acknowledged, recognized that although excess liquidity existed, there was demand for long-term financing hence the development of the stock exchange. Eita credits the current financial development to increment in commercial banks and other financial institutions.
“The entry of new commercial banks in the financial sector made an impact on the quality of products offered by the banking sector,” he argues.

The swelling number of commercial banks has then resulted in the banking sector taking its significant role within the financial system. Just after 1990, Eita argues that there have been some significant changes aimed at diversifying and integrating the financial sector into the whole economy.
“The increase in banking services indicate the widening and deepening of the financial system in Botswana,” he noted.

His view has since been acknowledged with a pinch of salt, with other researchers arguing that the results are “too strong” in view of the fact that the study only concentrated on the ratio of M2 to GDP as a proxy for financial development. They have since advised him to take other variables into consideration, such as the role played by the stock exchange and credit expansion. However, he told The Sunday Standard that such comments would be taken into consideration but he did not think they would affect the supply led view.


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