The effects of remittances on economic growth in Comoros and the role of bank credit

Abstract

This paper studies the effects of remittances on economic growth in Comoros over a period of 35 years from 1985 to 2019. In this country, these personal funds received predominate over other financial sources of foreign origin. Their current level is close to that of domestic credit provided by banks to the private sector. However, despite these trends, the study of their effects on the growth of the economy is less explored. Moreover, questions about the causality between remittances and bank credits and the role of these credits in the relationship between remittances and economic growth are not empirically studied in the national literature. According to our results, the Toda-Yamamoto (1995) test shows that the direction of causality is unidirectional from remittances to credits. To evaluate this causality, we estimated a credit model using the cointegration-ARDL approach of Pesaran and al (2001). The results of this model show that remittances have a significant positive influence on credit in the long term and a negative influence in the short term. Using the same ARDL technique, we also estimated three economic growth models to study the effects of remittances. Respectively, the results of the first two models show that remittances exert significant negative effects directly and indirectly through the final consumption expenditure channel. The third model leads to results justifying that these effects can become positive through the investment channel. As far as credits are concerned, all three models confirm that they have a positive and significant impact on economic growth. However, the level of this impact decreases when the interaction variable between remittances and investments is included in the model. According to these results, we show that bank credits may have a role in transmitting the beneficial effects of remittances to economic growth.

JEL classification: F24, E51, O47

Type of paper: Empirical research