Abstract
In an attempt to diversify itself away from the dominance of oil on its economy, Saudi Arabia needs to emphasize on the growth of its private sector. Currently, the private sector’s contribution to economic growth is meager as the oil sector dominates the economy. This study attempts to assess the role of financial development towards the growth of the private sector. Assessing this relationship is important, as it is quite probable that the dominant oil sector attracts the financial resources, affecting the private sector adversely. Johansen’s method of cointegration is applied on the data for the period 1985–2018. The private sector’s gross domestic product has a negative relation with the supply of money, positive relation with bank credit to private sector, and no significant relationship with share market capitalization, as shown by the results of the study. In addition, the private sector’s growth has a positive and significant relationship with government expenditure, investment, and trade openness. Hence, the study recommends further strengthening of financial sector services. Besides the current trend on government expenditure, investment and trade openness should continue to enable the private sector to contribute significantly to the economic growth of the country. A previous study on the private sector’s growth and financial variables is exclusively missing, and makes this study unique.
Highlights
Financial development is important for economic growth as it mobilizes savings and assists in capital accumulation
The results indicate that all the variables have unit roots and become stationary at first difference, except for one variable
Though there have been many attempts to study the relationship between financial variables and economic growth, this study innovates by emphasizing the private sector
Summary
Financial development is important for economic growth as it mobilizes savings and assists in capital accumulation. The combination of these two factors leads to the efficient use of the factors of production, leading to economic growth This financial development is more likely to happen in the private sector, which happens to be a free market for factors of production with minimal government interference and devoid of inefficient market distortions In light of these discussions, the current research attempts to explore the influence of financial variables on the non-oil private sector growth of Saudi Arabia. For the functioning of the private sector, apart from regular macroeconomic variables like investment, government expenditure, and trade openness, financial variables are crucial. The study aims to test the hypothesis that financial development leads to the growth of the private sector in Saudi Arabia. The paper ends with insights upon which to throw light
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