Stock Market Development, Financial Deepening and Economic Growth in Africa

Abstract

In this study, we employed the dynamic autoregressive distributed lag bounds test, co-integration test and granger causality test to examine the long-run and short run interrelationship among financial deepening, stock market development and economic growth for eight (8) countries in Africa using annual data for the period 1996-2019 to establish the interrelationship between Africa’s developing capital markets and the real side of their economies. While we found the series in five countries (Nigeria, Algeria, Namibia, Kenya and Mauritius) to be co-integrated; three other countries were not. The result from the granger causality test established bi-directional causality between economic growth (lnGDP) and stock market development (STMCAP/GDP) in Algeria, Namibia and Mauritius as the remaining five countries recorded only unidirectional causality from economic growth (lnGDP) to stock market development (STMCAP/GDP). Our panel analysis revealed a positive relationship between stock market development (STMCAP/GDP) and financial deepening (M2/GDP). There is a positive relationship between economic growth (lnGDP) and financial deepening (M2/GDP) for all the countries except for Eswatini and Mauritius. Further analysis of the interrelationship with economic growth (lnGDP) as dependent variable found significant and varying results for the time series across countries. However, the results from the panel regression found no significant effect from both financial deepening (M2/GDP) and stock market development (STMCAP/GDP) in Africa. To this end, we recommend swift and systematic reforms tailored towards improving the efficiency for their capital markets.