Effects of Fiscal Deficit on Economic Growth in Sub-Saharan Africa: A Dynamic Panel Data Analysis
DOI:
https://doi.org/10.20372/star.v12i1.05Keywords:
Fiscal deficit, Economic growth, System GMM, SSA countries, EffectAbstract
The study examines the impact of budget deficits on GDP growth in 42 sub-Saharan African countries between 2011 and 2021 using a two-step GMM approach. The data is sourced from the World Development Indicator and shows no signs of random walk. Fiscal deficits negatively impact long-term economic growth in these countries, but they help in the short run. The GMM method shows that long-term economic growth decreases by 0.013 percent for every one percentage point change in fiscal deficit. However, a 0.036 percentage point boost in economic growth is linked to a percentage point shift in the deficit in the near run. Budget deficits have a larger positive short-run coefficient than negative long-run coefficients. The study suggests that real interest rates and gross fixed capital creation are the main drivers of economic growth in SSA countries. The long-term economic success is positively and significantly affected by gross fixed capital formation. The report concludes that SSA states should reduce their budget deficits and increase funding for gross fixed capital formation.
Downloads
Metrics
References
Abel Molocwa, G., Khamfula, Y., & Cheteni, P. (2018). Budget deficits, investment and economic growth: a panel cointegration approach. Investment Management and Financial Innovations, 15(3), 182–189. https://doi.org/10.21511/imfi.15 (3).2018.15
Anyanwu, J. C., & Salami, A. O. (2021). The impact of COVID-19 on African economies: An introduction. Revue Africaine de Developpement [African Development Review], 33(Suppl 1), S1–S16. https://doi.org/10.1111/1467-8268.12531
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277. https://doi. org/10.2307/2297968
Artés, J., & Jurado, I. (2018). Government fragmentation and fiscal deficits: a regression discontinuity approach. Public Choice, 175(3–4), 367–391. https://doi. org/ 10.1007/s11127-018-0548-y
Aslan, A., & Altinoz, B. (2021). The impact of natural resources and gross capital formation on economic growth in the context of globalization: evidence from developing countries on the continent of Europe, Asia, Africa, and America. Environmental Science and Pollution Research International, 28(26), 33794–33805. https://doi.org/10.1007/s 11356-021-12979-7
Awolaja, G. O., & Esefo, I. O. (2020). Budget deficit and economic growth in sub-Saharan Africa: A PMG approach. Asian Journal of Economics Business and Accounting, 1–10. https://doi.org/10.9734/ ajeba/2019/v13i330174
Banerjee, R. N., Boctor, V., Mehrotra, A., & Zampolli, F. (2022). Fiscal deficits and inflation risks: the role of fiscal and monetary policy regimes BIS Working Papers | No 1028 | 07 July 2022. https://www.bis.org/publ/work1028.htm
Batrancea, L., Rathnaswamy, M. K., & Batrancea, I. (2022). A panel data analysis on determinants of economic growth in seven non-BCBS countries. Journal of the Knowledge Economy, 13(2), 1651–1665. https://doi.org/10.1007/s13132-021-00785-y
Batrancea, L., Rathnaswamy, M. M., & Batrancea, I. (2021). A panel data analysis of economic growth determinants in 34 African countries. Journal of Risk and Financial Management, 14(6), 260. https://doi.org/10.3390/jrfm14060260
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi. org/10.1016/s0304-4076(98)00009-8
Chandra, R. (2022). Paul Romer and modern endogenous growth theory. In Palgrave Studies in Economic History (pp. 251–281). Springer International Publishing.
Dauti, B., & Elezi, S. (2022). Economic growth in the Central East European Union and the Western Balkan countries in the course of Stability and Growth Pact and COVID-19. Zbornik Radova Ekonomskog Fakulteta u Rijeci Časopis Za Ekonomsku Teoriju i Praksu/Proceedings of Rijeka Faculty of Economics Journal of Economics and Business, 40(1), 29–61. https://doi.org/ 10.18045/zbefri.2022.1.29
Dick, S. (2022). Impact of fiscal deficit on Nigeria’s macroeconomic performance. https://doi.org/10.14293/s2199-1006.1.sor-.ppyxlif.v1
Ehigiamusoe, K. U., & Lean, H. H. (2020). The role of deficit and debt in financing growth in West Africa. Journal of Policy Modeling, 42(1), 216–234. https://doi.org/ 10.1016/j.jpolmod.2019. 08.001
Fk., S. (2018). Effect of interest rate on economic growth: Swaziland as a case study. Journal of Business & Financial Affairs, 07(03). https://doi.org/10.4172/ 2167-0234.1000345
Glüzmann, P. A., Levy-Yeyati, E., & Sturzenegger, F. (2012). Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited. Economics Letters, 117(3), 666–672. https://doi.org/10. 1016/j.econlet.2012.07.022
Habib, M. M., Mileva, E., & Stracca, L. (2017). The real exchange rate and economic growth: Revisiting the case using external instruments. Journal of International Money and Finance, 73, 386–398. https://doi.org/10.1016/j.jimonfin. 2017.02.014
Hansen, L. P. (2018). Generalized method of moments estimation. In The New Palgrave Dictionary of Economics (pp. 5201–5211). Palgrave Macmillan UK.
Haroutunian, S., Osterloh, S., & Sławińska, K. (2021). The initial fiscal policy responses of euro area countries to the COVID-19 crisis. https://www.ecb.europa.eu/pub/economic-bulletin/articles/2021/html/ecb.ebart202101_03~c5595cd291.en.html
Howitt, P. (2018). Endogenous growth theory. In The New Palgrave Dictionary of Economics (pp. 3632–3636). Palgrave Macmillan UK.
Khan, M. A., Naqvi, H. A., Hakeem, M. M., Din, G. M. U., & Iqbal, N. (2022). Economic and financial impact of the COVID-19 pandemic in South Asia. Environmental Science and Pollution Research International, 29(11), 15703–15712. https://doi.org/10.1007/s11356-021-16894-9
Kryeziu, N. H., & Hoxha, E. (2021). Fiscal Deficit and its effects on economic growth: Empirical evidence. International Journal of Finance & Banking Studies (2147-4486), 10(1), 62–70. https://doi.org/10.20525/ijfbs.v10i1.1064
Kurantin, N. (2017). The effects of budget deficit on economic growth and development: The experience of Ghana (1994 – 2014). European Scientific Journal, 13(4), 211. https://doi.org/10.19044/esj.2017.v13n4p211
Lau, W.-Y., & Yip, T.-M. (2019). The nexus between fiscaldeficits and economic growth in ASEAN. Southeast Asian Economies, 36(1), 25–36. https://www. jstor.org/stable/26664251
Mandeya, S. M. T., & Ho, S.-Y. (2022). Inflation, inflation uncertainty and the economic growth nexus: A review of the literature. Folia Oeconomica Stetinensia, 22(1), 172–190. https://doi. org/10.2478/foli-2022-0009
Nazmuddin, M. (2021). Debt, deficit and economic growth in south Asia: A comparative analysis. In Development, Governance and Gender in South Asia (pp. 35–54). Springer Singapore.
Njie, M., & Badjie, M. (2021). The effects of interest rate on economic growth: Further insights from the Gambia. Journal of Economics and International Finance, 13(2), 100–105. https://doi.org/10.5897/jeif2021.1127
Oyeleke, O. J. (2021). On the non-linear relationship between fiscal deficit and inflation: The Nigeria experience. International Advances in Economic Research, 27(2), 105–117. https://doi.org/ 10.1007/s11294-021-09822-7
Rahman, S. H., & Siddiquee, M. S. H. (2022). Short- and long-run growth effects of fiscal policy in Bangladesh. SN Business & Economics, 2(9). https://doi.org/ 10.1007/s43546-022-00326-y
Rapetti, M. (2020). The real exchange rate and economic growth: A survey. Journal of Globalization and Development, 11(2). https://doi.org/10.1515/jgd-2019-0024
Seraj, M., & Coskuner, C. (2021). Real exchange rate effect on economic growth: comparison of fundamental equilibrium exchange rate and Balassa–Samuelson based Rodrik approach. Journal of Applied Economics, 24(1), 541–554. https://doi. org/10.1080/15140326.2021.1977083
Sharma, V., & Mittal, A. (2019). Fiscal deficit, capital formation, and economic growth in India: a nonlinear ARDL model. Decision, 46(4), 353–363. https://doi.org/10.1007/s40622-019-00223-8
Silahtaroğlu, G., Dinçer, H., & Yüksel, S. (2021). Identifying indicators of global financial crisis with fuzzy logic and data science: A comparative analysis between developing and developed economies. In Data Science and Multiple Criteria Decision Making Approaches in Finance (pp. 17–53). Springer International Publishing.
Timuno, S. O. M., & Eita, J. H. (2020). Towards an effective fiscal stimulus: Evidence from Botswana. Cogent Economics & Finance, 8(1), 1790948. https://doi.org/10.1080/ 23322039. 2020. 1790948
Tran, O. K. T. (2022). Does there exist an optimal budget balance to improve economic growth? empirical evidence from Asian countries. Cogent Economics and Finance, 10(1). https://doi.org/ 10. 10 80/23322039.2022.2114174
World Bank. (2021, October 6). Sub-Saharan Africa exits recession in 2021 but recovery still vulnerable. https://www.worldbank. org/ en/news/press-release/2021/10/06/ sub-saharan-africa-exits-recession-in-2021-but-recovery-still-vulnerable
World development Indicator. (2021). World development indicators https://databank. worldbank.org /selection-of-indicators/ id/fc321ecc.
Zhu, W., Ahmad, F., Draz, M. U., Ozturk, I., & Rehman, A. (2022). Revisiting the nexus between exchange rate, exports and economic growth: further evidence from Asia. Economic Research-Ekonomska Istraživanja, 35(1), 7128–7146. https: //doi .org/10.1080/1331677x.2022.2059692
Downloads
Published
How to Cite
License
Copyright (c) 2023 Journal of Science, Technology and Arts Research
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
STAR © 2023 Copyright; All rights reserved
