Examining the relationship between remittances and financial development in Zimbabwe

This study examines the short-run and long-run relationships between remittances and economic growth in Zimbabwe from 1980 to 2022, using the autoregressive distributed lag (ARDL) bounds testing approach. To ensure the reliability, validity, and stability of the data, the study used the Jacque-Bera normality test, Breusch Godfrey serial LM test, and Bruesch-Pagan-Godfrey heteroskedasticity test together with a cumulative sum of recursive residuals and cumulative sum of recursive squares. The dependent variable in this study is domestic credit to the private sector as a percentage of GDP, and the independent personal remittances as a percentage of GDP, with the control variables per capita GDP growth, inflation, and gross fixed capital formation. The theoretical framework explores key perspectives, including the remittance-development optimist view, which posits that remittances can drive investment and economic progress; the supply-leading hypothesis, suggesting financial development as a precursor to economic growth; and the growth-led hypothesis, which sees economic development as a catalyst for financial development. The results from the ARDL test show no evidence of co-integration in the long run; however, in the short run, a significant positive effect on financial development is observed. This finding supported the complementarity theory and showed how remittances stimulate demand for financial services. Particularly problematic was the negative and statistically significant effect of inflation on financial development, which can potentially harm the performance of financial markets and slow down financial activities. The study suggests implementing targeted policies to limit parallel market activities and direct resources towards the formal sector.