Remittances and economic development in Lesotho: does financial sector development matter?

This paper conducts an empirical investigation of the effect of remittances on economic development in Lesotho, with particular attention paid to the role financial development plays in affecting this relationship. We made use of the fully-modified OLS (FMOLS) estimation technique to examine the long run relationship between remittances and development, and this helped to control for potential endogeneity bias. The results of econometric estimations revealed that remittances have had a significant positive effect on development. Also, the results showed that financial development, when measured by broad money exerts a positive effect on development in Lesotho. When remittances were interacted with financial development, the results showed a significant coefficient. This result indicates that remittances act a buffer for alleviating credit constraints of households and also acts to ameliorate inefficiencies of the financial system on poor households.