Fiscal deficit in sub-saharan Africa: A new intuition from the institution and political drivers

Abstract

Motivated by the growing fiscal deficits in sub-Saharan Africa, this study examines fiscal deficit’s economic, political, and institutional drivers using a panel of twenty-three sub-Saharan African countries. Panel spatial consistent correlation, dynamic fixed effects autoregressive distributed lag, and feasible generalised ordinary least squares were used as the estimation techniques. Our findings reveal that while per capita income, trade openness, population, and religious tension increase the size of fiscal deficit, bureaucracy quality, government stability, Law and order, and military in politics reduce the extent of fiscal deficit. However, corruption control, democratic accountability, and internal conflict have weaker statistical evidence. Furthermore, the study established evidence of long-run co-integration relationships among institutional factors, economic factors, and fiscal deficits in SSA. Per capita income has a significant positive influence in the short run but a negative effect in the long run. Population and religious tension positively impact fiscal deficit in both periods. However, democratic accountability, government stability, and the military in politics significantly negatively impact fiscal deficit in the long run. This study concludes that beyond economic factors, institutional and political factors are significant drivers of fiscal deficit in sub-Saharan Africa. Therefore, strengthening the institutional quality and creating a stable political environment would lessen the accumulation of fiscal deficit.