The Impact of Financial Development on Private Sector Growth in the Oil-Based Economy of Iraq

The main objective of this study is to examine the impact of financial development on private sector growth in Iraq's oil-based economy. To test the hypotheses, the Vector Error Correction Model (VECM) was employed to estimate the research model over the period from 2008 to 2022. The estimation results reveal a significant positive relationship between financial development indicators and private sector growth. Specifically, the ratio of the total money supply to GDP and the value of stock market transactions—both indicators of financial development—contribute to increased private sector growth in Iraq. In this context, it is essential to establish the necessary institutional conditions and a conducive environment to support the financial development process and thereby enhance the potential for private sector growth. However, the ratio of credit to the private sector to GDP, used as a measure of financial depth, was found to have a positive but statistically insignificant effect on private sector growth. This suggests that Iraqi banks have not played an effective role in supporting the private sector. Therefore, the Central Bank should adopt cautious and well-targeted monetary policies, leveraging oil revenues to promote coherence and integration within financial markets and to create the necessary environment for strengthening formal financial institutions in Iraq.