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Abstract

This study investigated the causal link between financial development and merchandise exports using simultaneous-equations models for SSA countries over the period 1986-2016. The analysis is conducted using an instrumental Generalized Method of Moments (IV-GMM) to examine the two-way linkages between financial development and exports for the panel of 25 SSA countries. The results show that the level of financial development does not affect exports in SSA, rather it is exports that influences the level of finance. With regards to individual countries in the panel, while the level of financial development dampens merchandise exports in Burkina Faso and Rwanda, exports on the other hand matters for the development of the financial sector in Benin, Mauritius, and Togo. There is evidence that positive bi-causal relationship in finance – exports nexus exists in Gambia, Namibia, Nigeria, South Africa, Tanzania, and Uganda while the bi-causal impact of financial development on exports is negative in Cape Verde, Central Africa Rep., Cote’ d’Ivoire, Ethiopia, Ghana, Kenya, and Zambia, implying that the eve of financial development is detrimental to trade in those countries. As a policy measure, the policymakers in SSA would need to deepen existing trade policy reforms to increase the volume of trade in the region as well as evolving country-specific policies to address structural constraints that have hampered the prospects of the intermediation function that could help mobilize resources in support of more trade volume which can in turn promote the development of the financial sector