Financial Deepening and Economic Growth in Zambia

Abstract

A strong financial system with a wide range of financial services has an impact on economic growth and development. In this paper, we examine the effects of financial deepening on Zambia’s economic growth using data from 1986 to 2017. Financial deepening is approximated by domestic credit to the private sector as a ratio of GDP (DCPY), liquid liabilities as a ratio of GDP (LLY), and financial system deposits as a ratio of GDP (FSD). We use bound test approach to co-integration that justified the use of the Autoregressive Distributed Lag (ARDL) model. The study found that DCPY had an insignificant effect in the short-run but a significant negative effect in the long-run, whilst the variables LLY and FSD had insignificant effects in both the long-run but their two previous values had significant effects in the short-run. LLY’s values had positive significant effects while FSD’s values had negative significant effects. Therefore we concluded that there is weak link between financial deepening variables and GDP growth rate in Zambia.