Stock Market Development, Financial Deepening and Economic Growth in Africa

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 vary-ing 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.


Introduction
The roles of financial markets and the deepening of the financial systems are very crucial to the advancement of all modern societies. This is in line with modern growth theories highlighting the significance of stock markets and financial development in the pursuit of macroeconomic goals even though both the empirical and theoretical literature remains inconclusive and populated with mixed findings. More important is also the fact that; most of the empirical literature has centered on the most advanced economies of North America, Europe and some emerging economies in Asia due to the long history of their financial markets, robustness and the availability of data. The stock market performs several roles, including the breaking of bulky transactions, capital allocation and generally serves as an information channel for investors. In this paper we examine the interrelationship among financial development, stock market development and economic growth in eight (8) Africa countries (Nigeria, Algeria, Namibia, Kenya, Mauritius, Eswatini, South Africa and Tunisia) using annual data for the period 1996 to 2019 to highlight the interrelationship between the financial sector and the real side of the economy. Our choice of countries is solely based on the availability of data of the stock market of these countries.
South Africa has the oldest (and most robust) stock market after Egypt whilst the markets in the remaining seven (7) are quite younger and liquidity constrained.
In this study, the ratio of stock market capitalisation to GDP is our measure for stock market development, the ratio of broad money (M2) to GDP is our measure for financial deepening and also annual series of GDP as our measure of economic growth. Our choice of the ratio of stock market capitalisation to GDP as our measure for stock market development is based on the assumption that the entire market size is positively related to the capacity of the market to mobilise capital and diversify risk on a macro scale. We adopt the ratio of broad money (M2) to GDP as our measure of financial deepening; envisaging that economic growth will trigger or stimulate financial deepening.
The remainder of the paper is arraigned as follows; the literature review is presented in Section 2. The source of the data and methodology is presented in Section 3. Section 4 presents the empirical results, Section 5 presents the conclusion, recommendations and suggestion for further studies.

Literature Review
The desire or pursuit by national governments to establish, develop and promote strong and robust financial markets is based on the growing and available theoretical and empirical literature that argues in favor that, the development of stock market stimulates economic growth. Arestis et al. (2001) investigated the causal relationship between stock market development and economic growth in five (5) developed countries using time series methods after controlling for the impact of banking systems and the volatility in the stock market. They found evidence supporting the claim that though banks and stock markets promote 3 Journal of Financial Risk Management economic growth, however the impact of the banking system is more significant.
They therefore concluded that, the impact of the stock market on economic growth may have been overhyped in earlier studies that employed cross country growth regressions. Pradhan (2011) also examined the long run nexus between financial development and economic growth in India in a trivariate structure by including stock market development. He found that stock market development contributed significantly to the finance-growth inter-relationship. The study also established bidirectional relationship between financial development and economic growth whereas unidirectional relationship was found between economic growth and stock market development. Based on these findings, the study concluded that stock markets are core drivers of economic growth in India. Yu et al. (2012) provided new evidence on the significance of financial development and stock market development in explaining economic growth across regions and income distributions. The results from the variance decomposition of annual economic growth rate provided evidence of a unique direction, timing and strength of the causal links based on the report from the granger causality test between financial development, stock development and economic growth.
The call was therefore imperative to adopt concerted efforts to attain steady economic growth across different income groups and geographical regions. Guglielmo et al. (2004) adopted the methods of Toda and Yamamoto (1995) to test for causality in vector autoregressive models to answer the question on the effect of stock market development on economic growth by examining the causal relationship between economic growth, financial development and stock market development. From a sample of seven (7)

Data Sources and Definition of Variables
The data set adopted for this study is time series annual data obtained from the

Model Specification
In a standard macroeconomic model, the theory of money demand and its determinants is expressed as: where: M2/GDP is the measure of financial deepening.
Savings/GDP is the annual Savings to GDP ratio.
PSC/GDP is the annual total credit to the private sector credit to GDP ratio.
lnGDP is the natural log of annual gross domestic product; our economic growth indicator variable.
Infl is the annual general price level (inflation).
Exch is the annual official exchange rate.
STMCAP/GDP is the annual stock market capitalization to GDP ratio as our stock market development indicator.
Equation (1) is formally expressed as: where, ε it is the stochastic error term.
A negative relationship is expected between economic growth indicator (lnGDP) and the financial deepening indicator. Whereas a positive relationship is expected between stock market development (STMCAP/GDP) and financial deepening (M2/GDP).

ARDL Model Specification
The study adopts the ARDL bounds cointegration technique developed by Pesaran et al. (2001)  , , , , k p q q q  ) model specification is stated as follows (Pesaran et al., 2001):  The correlation matrix among the variables of this study is reported in Table   2. The report shows that except for three correlation coefficients, all others are weakly and statistically significant at 5%.
We present the result of the Im-Pesaran-Shin unit-root test of the panel is reported in Table 3. We report that Savings/GDP ratio and Inflation rate are not  Results of the Autoregressive Bounds Test for the times series analysis using lnGDP as dependent variable. Results of the Autoregressive Bounds Test for the times series analysis using M2/GDP as dependent variable.                      Table 16 is the results of the granger causality test between economic growth (lnGDP) and stock market development (STMCAP/GDP) for the series in Mauritius. The regression result indicates the presence of bi-directional causality between economic growth (lnGDP) and stock market development (STMCAP/GDP) in Mauritius. The Granger causality test for the panel series between STMCAP/GDP and lnGDP. Journal of Financial Risk Management We find bi-directional causality between stock market development (STMCAP/GDP) and economic growth (lnGDP).

Results
The table below is the report of the regression results with lnGDP (economic growth as the dependent variable) for countries with conitegrated series.
As reported in Table 17, the long run coefficients of stock market development (STMCAP/GDP) are negative and statistically significant at 10% and 5% for Namibia and Mauritius respectively. The coefficient of financial development indicator (M2/GDP) is also positive and statistically significant at 1% in Namibia but negative and statistically significant at 5% in Mauritius. Table 18 is the report of the regression results with lnGDP (economic growth) as the dependent variable for countries without conitegrated series.
We find that all the short run coefficients of the key variables of interest (STMCAP/GDP and M2/GDP) in the models are not statistically significant in Tunisia, South Africa and Eswatini. This finding is consistent with the findings of Nyasha and Odhiambo (2015) who established that market based financial development indicator was however statistically insignificant in South Africa.
The regression result for the paneljoint analysis is presented in Table 19. We found that all the long run coefficients of the explanatory variables are not statistically significant. However, the short run error correction is statistically significant at 5%. The short run coefficients of savings to GDP ratio (Savings/GDP) and exchange rate (EXCH) are also statistically significant at 5% and 1% respectively.

Conclusion
This study employed 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 in eight (8) Africa countries using annual data from the period 1996 to 2109. We showed from the granger causality test that stock market development only causes economic growth in Algeria, Namibia and Mauritius whilst a unidirectional causality from economic growth to stock market development was found in Kenya, Nigeria, Tunisia, Eswatini and South Africa. We also showed that the presence of co-integration among the series in five (5) countries (Nigeria, Algeria, Namibia, Kenya and Mauritius) and also for the entire panel.
Our results from the bounds test of the ARDL panel regression provided evidence of a positive relationship between stock market development and financial deepening in Africa. We also found the relationship between economic growth (lnGDP) and financial deepening (M2/GDP) to be negative in Africa. This means that with higher growth in the economy, corresponding growth in M2 must be attained to achieve higher growth in financial development. The time series result of the ARDL also provides mixed results for the effects of stock market development (STMCAP/GDP) on economic growth (lnGDP) in terms of statistical significance and direction (sign). For countries with the long run co-integrated series, we found that economic growth (lnGDP) positively and significantly affects financial deepening (M2/GDP) in Tunisia and South Africa but negatively in Eswatini. The stock market development indicator (STMCAP/GDP) also negatively and significantly affects financial deepening (M2/GDP) in Tunisia, South Africa and Eswatini.
We also presented further analysis among the development indicators using economic growth (lnGDP) as the dependent variable and financial deepening Journal of Financial Risk Management (M2/GDP) and stock market development as explanatory variables. We found the series to be co-integrated in five (5) countries (Nigeria, Algeria, Namibia, Kenya and Mauritius). From the long-run analysis, the study recorded positive and significant relationship between stock market development (STMCAP/GDP) only in Namibia and Mauritius. We also found that the relationship between financial deepening (M2/GDP) and economic growth (lnGDP) is positive in Namibia but negative in Mauritius. The short run analysis has also provided mixed evidence among the countries. Our findings from the granger causality test are consistent with the results of Pradhan (2018) who found both unidirectional and bi-directional causality between stock market development and economic growth per capita among G-20 economies from 1980 to 2015. In addition, our study shares similarities with Ake (2010) who employed times series data from the first quarter of 1995 to the fourth quarter of 2008 obtained from five (5) Euronext countries (Belgium, France, Portugal, Netherlands and United Kingdom) and established that countries with highly active and liquid stock markets the study found positive causal relationship between stock market and economic growth whereas no causal relationship was recorded in countries with less active and illiquid small stock markets.
Based on the results and discussions above, it is evident that the impact of the stock markets across Africa presents mixed results. We find that because most of the stock markets are small, less liquid and less efficient. We recommend and encourage financial markets players to institute major reforms and innovations in their stock markets to smooth out all the complexities and the inefficiencies inherent in their financial markets to achieve a positive link to the real side of the economy.

Suggestion for Further Study
It is suggested for further study that a comparative analysis is conducted between developed economies and developing economies as those in Africa, since this study only focuses on the interrelationships between financial development, stock market development and economic growth in Africa. Such a study will clearly provide evidence and the dynamics of the interrelationships between financial development, stock market development and growth for emerging economies to learn. Again, future studies may also analyse the effect of banking sector development on economic growth in Africa.