Financial liberalisation, financial development, savings and growth nexus in selected sub-Saharan African countries.
Mugisha, Benon Mutambi
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As a result of the failure of financial repression policies to deliver the desired economic growth, most SSA started liberalizing their financial sectors hoping that these reforms would lead to financial development, improve domestic savings and increase economic growth. This study evaluates the direct effects of financial liberalisation on financial development, domestic savings and economic growth for a sample of twelve sub-Saharan African countries over the period 1976 to 2007. An index of financial liberalisation is constructed and two approaches are employed to study the impact of financial liberalisation on financial development. The first approach compares the indicators of financial development in the pre- and post-liberalisation periods using the equality of means test while the second approach involves the estimation of a panel regression. The findings from the equality of means test do not provide conclusive evidence that financial liberalisation per se has a positive and significant effect on financial development. The outcomes of financial liberalisation vary from country to country but countries which managed to control inflation during and after liberalisation registered improvements in the indicators of financial development. On the other hand, panel econometric results find an overall positive effect of financial liberalisation on financial development while the inflation rate has a negative effect on financial development. The real interest rates and the corresponding spreads increased in the post liberalisation period in the majority of countries. The results also fail to provide support to the hypothesis that financial liberalisation increases domestic savings. Instead, the increase in private sector credit is found to have a negative effect on domestic savings thus providing support to the view that by easing borrowing constraints, financial liberalisation reduces savings. The results also fail to provide evidence of a direct positive relationship between financial liberalisation and economic growth. Economic growth is instead affected by government expenditure, trade openness, inflation, population growth, initial level of per capita income, and credit to the private sector. These findings imply that SSA countries should ensure that financial liberalisation policies are accompanied by measures aimed at reducing inflation. In order to promote domestic savings, countries should implement growth enhancing measures, raise per capita incomes and reduce the current account deficits. To promote economic growth, countries should implement policies that reduce government consumption expenditure, reduce inflation, increase trade openness and the investment rate.