External Debt, Investment, and Financial Development in Botswana and South Africa: A Multivariate Causal Analysis

Abstract

This paper employs a multivariate Granger-causality model to evaluate the causal relationship between external debt, financial development, and investment in Botswana and South Africa from 1980–2020. The study includes savings, trade, and economic growth as intermittent variables. Using the autoregressive distributed lag (ARDL) bounds testing approach; empirical results reveal that, for both Botswana and South Africa, there is no distinct short- and long-run Granger-causality relationship between external debt and either financial development and/or investment. However, for Botswana, there is a short-run unidirectional causal relationship from investment to financial development. While for South Africa, the opposite is true. That is, there is a short-run and long-run unidirectional causal relationship from financial development to investment. The policy implication for Botswana is to stimulate the real sector in the short run; immense efforts in promoting investment are recommended. Other results for Botswana support the concurrent promotion of investment, savings, and economic growth because these variables are found to have a short-run and long-run bidirectional causal relationship. For South Africa, it is primarily financial development that drives investment and economic growth. Therefore, policy should promote financial development to stimulate investment, both in the short and long run.