Financial Development and Economic Growth: A Case of Botswana 1980 - 2014

The study examines the long run and the short run relationship between bank and stock market developments and economic growth in Botswana using annual data over the period 1980-2014. Simple indices for bank development and for stock market development were constructed to proxy financial development in these sectors. The study used the ARDL approach is applied to test for the existence of the long run relationship. Granger causality was also used to test the direction of the relationship and E-views 8.0 to run the ARDL model. The results indicate the existence of a positive and statistically significant long run and the short run relationship between stock market development and growth which is consistent with other studies. On the other hand, bank developments were found to have a negative but statistically insignificant long-run relationship while in the short run the relationship remained negative but statistically significant. These results are interesting for a low income country like Botswana where banks are expected to have a sizable effect on growth than stock markets. The weak association between bank developments and growth may be a confirmation of inefficient credit allocation by the banks pointing to a poor regulatory environment and lack of supervision by the Central Bank. Investment and government expenditure was also found to contribute positively to economic growth while causality was found to be bidirectional. All in all, results seem to suggest that a stable economic environment coupled with strong institutions is critical for growth in Botswan