The impact of financial liberalisation on the economic performance of selected countries in sub-Saharan Africa

The theory of financial liberalisation advocates the ‘freeing up’ of financial markets in order to stimulate savings, investment, and ultimately economic growth. This is to be achieved by eliminating financial repression and letting the market allocate savers funds to investors. Both the quantity and quality of investment are expected to increase and these should lead to higher rates of economic growth. Financial liberalisation was embarked upon by many counties in Sub-Saharan Africa (SSA) from the mid-1980s into the 1990s and most of the literature about these experiences has been purely theoretical. The objective of this thesis is to examine the impact of financial liberalisation on the economic performance of 19 countries in SSA over the period 1975 - 2000.

Financial liberalisation is measured by four proxies. These are 2 liberalisation proxies that take account of the gradual progression in financial liberalisation policies, a dummy variable that takes on a value of 1 in the year that major moves towards liberalisation started, and the real rate of interest. Panel data techniques are employed in estimating savings, investment, and growth equations.

Our results show that financial liberalisation has not had the desired effect on the economic performance of countries in SSA. It is found that financial savings, private investment, total investment, and economic growth have had a negative relationship with financial liberalisation. The only variable which showed a positive relationship with financial liberalisation was national saving.

A case study for Nigeria showed that in the long run financial liberalisation has had a positive effect on financial savings and economic growth thus lending credence to the view that financial liberalisation causes distortions and crisis in financial markets in the short run, but is beneficial to economic growth in the long run.