Financial Sector Development and Economic Growth Nexus: Empirical Evidence from Sierra Leone

Abstract

The study examines the nexus between financial sector development and economic growth in Sierra Leone over the period 1980-2018. The stationarity test result shows that the order of integration of variables included in the model was a mixture of I (0) and I (1). Therefore, the study employs the bounds testing approach to Cointegration and error correction models developed within the Autoregressive Distributed Lag (ARDL) framework to explore the long-and short-run effects of financial sector development on economic growth. The study uses two different measures of financial development including, credit to the private sector and broad money. The study also investigates whether there are other determinants of economic growth. Evidence of short-run dynamics was found amongst the various financial development indicators and economic growth. The results showed that credit to the private sector and broad money influenced economic growth in the short-run. Again, inflation and government consumption expenditure were found to impede economic growth in the short-run. Contrarily, Gross capital formation and FDI were found to stimulate economic growth in the short-run. The study recommends that policy makers should take caution in the choice of financial development indicator as a policy instrument for the attainment of growth and development. Again on the basis of empirical evidence, policies to improve the accessibility of affordable credit by the private sector, including small and medium scale enterprises should be enforced.