Infrastructure Spending and the Regional Financial Development: Evidence from the Eastern African Belt and Road Initiative Countries

Abstract

This paper examines the causal relationship between infrastructure spending and regional financial development in Eastern Africa, including Ethiopia, Kenya, Tanzania, Rwanda and Uganda, for 2007–2017 within a trivariate vector autoregressive framework. We use the Global Financial Development Database from the World Bank. We extend the conventionally accepted ratio of financial development by including the Belt and Road Initiative (BRI) spending as an additional variable. The empirical strategy involves applying the Granger causality tests using the cointegration and vector error correction methodology. We find evidence of a two-way Granger causality: (1) between the BRI spending and regional financial development and (2) between the BRI spending and regional growth. These findings suggest that an increase in infrastructure spending, particularly in transport, telecommunications and energy, positively affects regional financial development in Eastern Africa and increases the unbanked population’s inclusion in the region.