Analysis of financial sector national accounts: Emphasis on financial intermediation (1995-2009)

Abstract

The study attempts to obtain good estimated measure of the output of financial services activities in the economy by first computing the gross output and value added of the financial intermediation services following international recommendations in the System of National Accounts 1993 (SNA 93). In this study the trends of the output and value added have also been computed. The period of coverage was 1995-1 to 2009-4.

A couple of methods were applied to first of all compute the dependent variable (Value Added) and then to analyse the data sets and produce the forecasting equation. The current prices gross output was deflated to obtain constant prices gross output. Constant prices gross output was then multiplied by a constant base period input/output ration to obtain the constant prices value added (the dependent variable). In order to determine the characteristics of each variable, stationarity tests including; graphical, Auto Correlation Function (ACF) and correlogram test, and Augmented Dickey-Fuller Unitroot Test were done. Differencing and lagging methods were applied to the non stationary variables wherever necessary to eliminate none compliance problems from the variables. The correlogram was used to determine the existence of multicollinearity and four variables (Bank Deposits, M1 Currency in circulation, M2 money supply and the loan stocks) were found to be correlated.

The study sought to determine the factors contributing to the growth of the financial intermediation activities/services and the financial sector in totality. In this study emphasis was on financial intermediation because it contributes to well over eighty percent of the output of the financial activities. In the reduced model three variables were found to be significant in the projection of the Financial Intermediation value added. The variables include; bank deposits, interest rates and bank rate and they all positively contribute to the forecast values. Forecasts for the 2010 and 2011 quarters, value added was done based on the empirical model and projections of the independent variables. There were no significant relationships between the loan stocks, money supply M2, currency in circulation M3 and price index to the trends of value added. Also inflation rates registered during the study period did not have a significant impact on the financial intermediation services performance.

On the basis of the findings of the study, the last section gives recommendations for the policy makers to take on if the growth of financial activities are to be stimulated and encouraged. The recommendations are based on the three variables namely; Bank deposits, bank rate and interest rates that were found to be significant in determining the performance of the financial intermediation services value added. The three variables were found to positively influenced trends of the value added.

The author recommends observance of stringent monetary and fiscal policies that will encourage savings to increase on the bank deposits, and monetary policies that will lead to high but not too high bank rates and therefore interest rates.