Finance-Growth Nexus in Eastern and Southern African Countries: Insights from a Panel ARDL Analysis

Abstract

This study analysed the finance-growth nexus for countries in the East African Community (EAC) and the Southern Africa Development Community (SADC). This was done an attempt to identify countries where Financial Sector Development (FSD) has the largest/least growth effect and the regional bloc moderation in such effect based on panel Error correction ARDL model. The aggregate data were obtained from the World Development Indicators (WDI) for a total of 14 countries, five (5) of which being in the EAC and the rest being in the SADC. The observations suggested that the regional bloc moderation effect transforms an otherwise insignificant effect of FSD on growth into a positive one specifically for broad money growth among the EAC member countries. This is a signal that a monetary union for EAC member countries could spur an overall welfare gain. Growth-finance nexus however, exhibited short and long run trade-offs in countries within the SADC. In the short run there have been significant GDP growth responses as a result of FSD but such effect turns out to be detrimental in the long run. As such difficult choices had to be made between addressing short run GDP volatility and achieving higher GDP growth in the SADC.