Financial Development and Economic Growth: Case of Liberia

Abstract

This study investigates the nexus between financial development and economic growth in Liberia, with a focus on post-civil war reforms and their implications. Using quarterly data from 2000 to 2023, the research employs the Vector Error Correction model and Granger causality tests to analyze the effects of various financial development indicators—specifically M2 (both including and excluding currency outside the banking system), domestic credit to the private sector, and mobile money—on real GDP growth. The results reveal a long-run equilibrium relationship between financial development and economic growth, with domestic credit to the private sector and the proportion of M2 within the formal banking system positively impacting growth. However, M2 inclusive of currency outside the banking system and mobile money adoption show negative long-term effects, potentially due to inefficiencies in financial intermediation and challenges in mobile money implementation. Short-run dynamics indicate that financial development does not have immediate significant effects on growth, and Liberia’s economy adjusts slowly to financial shocks. Based on these findings, this study recommended enhancing financial inclusion, encouraging savings mobilization, and addressing the challenges associated with mobile money adoption.