The Effect of Financial Development on Economic Growth in Sudan: Evidence from VECM Model

Abstract

The paper seeks to investigate the dynamic relationship between financial development and economic growth in Sudan during 1970–2012. Using Johnson approach to Co-integration and Vector Error Correction Model (VECM) to find out the long and short run effect of the financial sector development on economic growth. The test for Co-integration shows that there is a linear long run relationship between real GDP growth and financial development. The empirical results show that there is a marginal positive effect of financial sector development on economic growth in Sudan. Coefficient of error correction term is (-0.255) signifying about 25.46 percent annual adjustment towards long run equilibrium which is guaranteed the occurrence of a stable long run relationship among the variables. Financial sector reforms and changes into real sector required in order to allocate the financial resources efficiently. Hence, policy makers required to review the legal and institutional arrangements which contribute for financial repression to hinder financial sector efficiency.

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