Primary surplus dynamics and fiscal sustainability in sub-saharan African countries

Abstract

AbstractThe study analyzes the Bohn (2007) sustainability test, allowing for a quadratic fiscal reaction function to public debt levels over the period 2000–2019 for 40 countries in sub-Saharan Africa (SSA), employing a dynamic panel threshold model and other alternative estimation methods to investigate the reaction of fiscal policy and Dumitrescu–Hurlin Granger causality to identify potential causality linkages between government spending and revenue. Fiscal policy is found to follow a debt-stabilizing rule at a low to moderate level; however, fiscal responsiveness weakens when public debt to GDP ratio exceeds 55%, indicating that the use of primary surplus as an instrument to contain debt is insufficient when debt goes above the threshold, therefore jeopardizing the efficacy of fiscal retrenchments as an instrument to achieve sustainable debt reduction in SSA countries. The Dumitrescu–Hurlin result suggests a unidirectional flow from expenditure to revenue in SSA countries, implying that an increase in government spending has a substantial impact on widening fiscal imbalances and escalating debt levels within the SSA countries. Hence, governments in SSA countries should guarantee that public debt management strategies are in line with the public debt threshold to enhance fiscal sustainability. Considering these findings, this study highlights the importance of prudent fiscal management incorporating measures such as structural reforms, targeted investments, and prudent debt management strategies in SSA countries.