The effect of financial development on natural gas resource rent in Ghana

While a large body of literature presents evidence that the financial system of resource abundance countries is weak, much less is known about the effects of financial development on natural gas resource rent in developing countries like Ghana. I present the first study that examines the effects of financial development on gas resource rent. Using two different time series approaches, I find that financial development exerts a positive and significant effect on gas resource rent, implying that an efficient financial system or market promotes natural gas resource extraction. Specifically, the autoregressive distributed lag models (ARDL) estimates suggest that while net domestic credit per GDP and monetary sector credit to private sector per GDP exert a positive and significant effect on gas resource rent, both narrow money and broad money supply exert a positive but insignificant effect on gas resource rent. The sub-index of financial development created from principal component analysis (PCA) confirms the positive effect of financial development on gas resource rent, implying that financial development generally spurs gas resource rent. Also, Toda and Yamamoto (1995) causal estimates suggest that financial development has a strong and significant influence on gas resource rent and not vice versa, using different measures of financial development. These findings suggest that in addition to institutional and economic factors considered in the literature, financial development indicators such as net domestic credit and monetary sector credit to the private sector play an important role in natural gas resource extraction and thus should be a factor of interest when devising policies.