Fiscal Policy and Economic Growth in Sub-Saharan Africa: A Dynamic Panel Data Analysis

Supervisors: Dr. Wondaferahu Mulugeta Demissie (Associate Professor of Economics)
Dr. Atnafu Gebre Meskel (Assistant Professor of Economics) The objective of this dissertation was to examine the effect of fiscal policy on the economic growth of SSA countries from the period of 2011-2022. The System GMM estimation technique was employed to analyze the panel data obtained from the World development indicator, world governance indicators, Heritage Economic Freedom Index, and e-government Development Index. As the entire dissertation conducted five independent studies, the result of the study is divided into five sections for convenience. Firstly, the result of the study revealed that government revenue adversely affects economic growth while institutional quality positively enhances economic growth before interacting with each other. Conversely, the interactive coefficient of government revenue and economic growth positively affected the real GDP growth rate of SSA countries. Estimation from the system GMM revealed that before interacting with institutional quality, a percentage change in government revenue, controlling other things, leads to a 0.0866 percent decline in economic growth while it marks a 0.2329 percent upsurge in economic growth in the presence of institutional quality. Secondly, the result of the study asserted that government expenditure adversely affects the economic growth of SSA in both the short and long run. The system GMM models revealed that a one percentage change in government final consumption expenditure is associated with a 0.0342 percent deterioration in GDP per capita growth in the short run while it leads to a 0.0045 decline in the GDP per capita growth of SSA countries, all other things controlled. This shows that the negative effect of government expenditure in the long run is lower than its adverse effect in the short run. Thirdly, the result of the study revealed that fiscal deficit has negative and significant effects in the long run while it has positive and significant effects on the economic growth of SSA countries in the short run. The result of the system GMM revealed that a percentage change in a fiscal deficit of SSA countries is associated with a 0.036 percent rise in economic growth in the short run while a one percentage change in fiscal deficit, keeping all other things constant, is associated with a 0.013 percent decline in economic growth of SSA countries in the long run. Fourthly, the result of the study also presented that the direct economic effect of fiscal policy is negative and significant in SSA countries. However, the interaction of fiscal policy with governance indicators has a positive and significant effect on economic growth. Accordingly, before interacting with governance indicators, a percentage change in fiscal policy leads to a 0.20 percent decline in the economic growth of SSA countries. Finally, the result of the study divulged that external debt has a significant negative impact in both the short and long run. Other things remaining constant, a percentage change in total external debt is associated with a 0.034 percent decline in the real GDP of SSA in the short run, while it leads to 0.65 percent shrinkage in the real GDP of SSA in the long run. The study concludes that the negative impact of the long run is greater than that of the short run. The policy implication of the study is that the SSA needs to strengthen government revenue management and improve institutional quality by promoting efficiency of the regulatory quality and the size of the SSA governments. The fourth study’s implication to policy is that policy makers in SSA countries should encourage economic policies that improve government effectiveness, strong corruption control, clean public services, and better regulatory qualities. Lastly, SSA countries are advised to allocate the external debt on projects that bring other investment opportunities to amortize external debt. Keywords; Government revenue, Government expenditure, Institutional quality, External debt, Governance, Fiscal deficit, Economic growth, Sub-Saharan Africa, System GMM