Impact of money supply, domestic credit to the private sector and investment on economic well-being in Mozambique

An application of the cointegration approach

Abstract

The promotion of responsible investment constitutes the basis for attracting new resources and involving the financial system in achieving the Sustainable Development Goals (SDGs). Although State intervention through policies, investments, regulations, and finance are key roles, it is important to remember that each transformation requires deep commitment and alignment from the private sector. On the other hand, despite the critical importance that the business sector plays (companies and financial institutions), there is still a lack of clarity or consistency about what it means for companies and financial markets to align with the SDGs. The study examined the impact of money supply, domestic credit to the private sector and investment on economic growth in Mozambique based on the ARDL cointegration approach and Granger Block Exogeneity Wald Tests between 1990 and 2022. Long-term results indicated that only the money supply has an impact on Mozambique's economic well-being by 2.733% while the short-term results indicate that the current money supply negatively affects economic growth by 0.399%. On the other hand, the money supply of two and three previous years (lags) positively impacts growth. Current domestic credit to the private sector and its first lag has a significant and positive influence on economic growth in Mozambique, while domestic credit, with the second and third lag, has a negative influence on growth. In terms of investment in the first and third lags, the impact on economic growth is negative, which suggests the need for the Government to rationalize the use of resources through transfers from consumption expenditure to investment expenditure. The results of the Granger causality test indicated that, in Mozambique, economic well-being measured by gross domestic product per capita has repercussions on the money supply and internal credit to the private sector. A unidirectional causality was found that goes from money supply to domestic credit and from investment measured by gross capital formation to domestic credit. The study recommends that the Bank of Mozambique adopt a monetary policy that regularly alternates between expansionary and contractionary, in order to allow an increase in the money supply to promote higher growth rates. The economy must allocate credits to more productive companies.