Financial Development and External Trade in Sub-Saharan Africa: are there Causality Relationships?

No Thumbnail Available



Journal Title

Journal ISSN

Volume Title




The relationship between financial development and external trade has become the interest of many scholars. This paper then explores the causality between them. Using data from a sample of 42 sub-Saharan African countries, the researcher estimated the causality between financial development and external trade using a dynamic panel data model. The findings uncover that financial development has a positive and significant impact on countries in Sub-Saharan Africa's external trade after controlling for the lag of external trade, foreign direct investment, government consumption, and population. It means that financial development encourages external trade, and its contribution is currently significant in sub-Saharan African nations. Although there is a low level of financial access, financial depth, and financial efficiency in the study region, its contribution is paramount. Similarly, the external trade for the current year is statistically significantly dependent on the external trade for the preceding year in sub-Saharan African nations. Moreover, foreign direct investment and government spending have a significant positive impact on the region's external trade. Besides, our findings also indicate a bidirectional causal relationship between financial development and foreign trade. Therefore, it’s important to encourage Sub-Saharan nations to seek policies that will hasten the development of their banking sectors in order to increase their foreign trade, and it is also necessary to increase government expenditure on productive sectors and foreign direct investment to improve external trade.