Financial development in Botswana: in search of a finance-led growth response

In this paper, we examine the causality between financial development and sustainable growth in Botswana using the newly developed ARDL-bounds testing approach. Our results show that the causal relationship between financial development and sustainable economic growth is sensitive to the proxy used for measuring financial development. When the domestic credit to the private sector (DCP/GDP) is used as a proxy for financial development, a finance-led growth is found to prevail. However, when the ratio of broad money to GDP (M2/GDP) and the ratio of the bank deposits to GDP (BD/GDP) are used, a distinct growth-led finance seems to prevail. This finding shows that the relationship between financial development and economic growth in Botswana is not unambiguous, and that both the real sector and the financial sector of the economy should be developed simultaneously, in order to promote the overall development of the economy. This applies irrespective of whether the causal relationship is estimated in the short run or in the long run.