Thursday, October 29, 2020

The financial sector has no long term impact on the growth of the economy ÔÇô research

A research paper by an Economist at Bank of Botswana (BoB), Malebogo Ntsosa, found that financial sector does not stimulate the growth of the economy only except in the short-term. The paper examined the relationship between financial development and economic growth in Botswana for the period 1995 (first quarter) to 2013 (fourth quarter) using quarterly time series data. 

“However, these results should not be seen as discounting the importance of financial sector development in support of future growth and diversification of the Botswana economy,” Ntsosa highlights. Ntsosa explained the finding in part by the way in which Botswana’s economy is structured in that government makes a significant contribution to the economy’s output, Gross Domestic Product in other words, which as a result overshadows the impact of the financial sector development. The results however suggest that should the structure of the economy shift its dominance on mining activities to a more diversified economy the financial sector could start to have a more positive influence on economic growth in the long run. “For many years, economic growth in Botswana has been driven mainly by growth in the mining sector and its spill over to the growth of government and its expenditure programmes. However, looking ahead, it is not unreasonable to anticipate a more meaningful relationship between finance and growth as the influence of government lessens as in the context of a more diversified economy,” it says.  

Ntsosa did however find that in the long run economic growth exerts a positive influence on the development of the financial sector, regardless of the measure of financial deepening. The findings explain that this is because as the economy grows it creates the need for new and increased financial services and products, which as a result fosters growth in the financial sector. “Subsequently, robust economic growth could stimulate financial deepening, by stimulating the supply of financial services,” Ntsosa notes. 

In terms of the measure of growth of both the financial sector and the economy, Ntsosa asserts that financial sector development has generally expanded more than the average growth in national output. The financial sector’s growth is considered to have taken tremendous strides after the early 1990’s, a time referred to as a changing period for the sector. Rapid growth in the financial sector was observed following that period. Ntsosa mentions the significant economic traction that Botswana experienced since 1966 taking it from a poverty stricken country to now a middle income country.  

The findings by Ntsosa come almost a decade after Joel Hinaunye Eita’s conclusions on the same subject which however produced differing results to that of Ntsosa. The South African Economist Eita had analysed the causal relationship between financial development and economic growth for the period 1977 to 2006. His findings supported and illustrated both the influence of the development of the financial sector in that it results economic growth and development (supply-leading view) and that likewise economic growth stimulates the development of the financial sector seen through the deepening of services and products (demand-leading view). The difference between the two Economists’ findings is that Eita observed the influence of the financial sector development on economic growth both in the short and long term whereas Ntsosa concluded that the stimulation is only seen in the short term. Eita and Ntsosa used different methods to arrive at their findings. The similarity in the results is that economic growth results in the maturity of the financial sector.   

The financial sector has in recent times contrary to its historical growth undergone a slim down. The sector, in terms of profitability, has significantly trimmed down particularly due to the depressed interest rate environment. The economy has also plunged due to the prevailing low commodity prices. This could have a negative impact on both the influence of the economy in deepening the growth of the financial sector as well as the contribution of the sector to the economy.

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