Financial Intermediation and Economic Growth in Sudan: An Empirical Investigation, 1970-2011

Abstract

This paper investigates empirically the long-run relationship and short-run dynamic linkages between financial development and economic growth in Sudan during the period 1970- 2011. The study employs the autoregressive distributed lag (ARDL) approach to co-integration. The analysis is carried out using three indicators to measure the level of financial developments which are the ratio of the credit provided to private sector by commercial banks as a percentage of GDP, the ratio of liquid liabilities of commercial banks to nominal GDP and the broad money supply as a percentage of GDP. We also include four control variables in our analysis. These variables are inflation rate, trade openness, gross investment and government expenditures. As financial development indicators concerned, the result of the long run analysis indicates that credit to the private sector and the liquid liabilities exert positive effect while money supply affect real per capita GDP negatively. The credit to the private sector and the liquid liabilities coefficients have expected signs. Although the relation between financial development indicators and real per capita GDP is low and insignificant especially in the case of liquid liabilities and money supply, credit to the private sector is the only indicator that affects the economy in Sudan in the long-run. Although we could not find any short-run relationship between the explanatory variables and real per capita GDP in Sudan, these variables are found to be related in the long-run. The results indicate that government expenditure, inflation, money supply and trade openness exert negative effects, while investment, private credit and liquidity have positive effect on real per capita GDP. These findings may be attributed to the weak capital base of Sudanese banks, the high cost of borrowing due to insufficient inter-bank competition, the risk of extending credit to sectors other than trade, which is considered by banks as unjustifiably high and the absence of an appropriate investment climate required to foster significant private investment and promote growth in the long run.