2023/11/20 by Daba, Isubalew, Mulugeta, Wondaferahu, Gebremeskel, Atnafu
#Economic growth #Effect #Fiscal deficit #SSA countries #System GMM
paper · doi:10.20372/star.v12i1.05
This study investigates the short-run and long-run effects of fiscal deficits on the economic growth of 42 sub-Saharan African countries using a two-step GMM system for the period 2011–2021. The panel data is extracted from the most unswerving source, the world development indicator. Levin-Lin-Chu and Hadri LM tests for unit root were utilised and indicated that the data is free from any threat of random walk. The result of the study reveals that the fiscal deficit has negative and significant effects in the long run while having positive and significant effects on the economic growth of SSA countries in the short run. The result of the GMM system revealed that a percentage change in the 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 the fiscal deficit, keeping all other things constant, is associated with a 0.013 percent decline in the economic growth of SSA countries in the long run. The result of the study also revealed that the positive short-run coefficient of the fiscal deficit is greater than the negative long-run coefficient. Further, the study also publicised that gross fixed capital formation and the real interest rate are the main engines of economic growth, while the real effective exchange rate and inflation hurt economic growth in the short run. Furthermore, gross fixed capital formation is found to have a positive and significant effect on the economic growth of SSA countries in the long run. For policymakers, the study suggests that SSA countries should control their fiscal deficits and divert more resources towards gross fixed capital formation in the long run.