Financial Development And Economic Growth In Namibia

ABSTRACT

The objectives of this paper are to: examine whether there is a long-run relationship

between financial development and economic growth in Namibia and hence determine

the direction of causality as well as the implications of such results for a financial sector

policy- oriented growth in the economy. In order to test for the existence of long run

relationship between the variables, the study employs a cointegration and error correction

modeling (ECM) technique.

The study uses quarterly data on the following variables: broadly defined money supply

(M2); gross domestic product (GDP); credit to the private sector; commercial bank

branches; inflation; and the openness index for the period 1993 to 2005. The degree of

correlation between the financial sector development and growth does not necessarily

mean the existence of a causal relationship among them; it may simply be attributed to

the association of a third variable. Accordingly, a formal procedure called Granger-

Causality test was applied to the variables to test for the direction of causation between

variables.

An empirical model for determinants of output growth with financial sector development

as one of the explanatory variables is then estimated. The empirical results indicate that

financial sector development is positively correlated with real GDP growth. The Granger

causality test shows that the direction of causality runs from the financial development

variables to GDP. Thus it is concluded that financial sector development have a positive

effect on economic growth in Namibia. The study is organised as follows, Chapter 1 is

the introduction, Chapter 2 reviews the recent economic developments, Chapter 3 looks

closely into the Namibian financial sector, Chapter 4 explores the theoretical and

literature review, Chapter 5 presents the methodology, Chapter 6 contains the empirical

analysis and interpretations, while Chapter 7 comprises of the conclusions, policy

implications and recommendation.