Analysis of Savings-Investment Gap in Sub-Saharan Africa: Does the nexus between Foreign Remittances and Domestic Financial Sector matter?

Abstract

Abstract In recent times, increasing attention is being paid to examine the developmental impact of remittances inflow, particularly due to the emergence of remittances as the fastest growing source of capital flows for developing countries. To this end, we contribute to the literature by analyzing the interactive effects of remittances and financial development on savings-investment gap for a panel of 18 Sub-Saharan African (SSA) countries over the period of 1990 to 2017. Our Panel ARDL model estimation showed that higher remittances have significant reducing effect on savings-investment gap in the long run, and this becomes magnified while accounting for individual and interactive effects of remittances and financial development. We also uncovered the widening effects of rising real GDP growth and bank deposits over a long-term horizon, whereas higher private sector credit widens the savings-investment gap only in the short-run. Meanwhile, liquid liabilities have no significant effect on savings-investment gap both in the short run and long run. We further offered evidence on the complementarity and substitutability effects of remittances and financial development over the short-term and long-term horizons, respectively. We also demonstrated the superior forecast accuracy of the predictive savings-investment gap model - that accounts for both individual and interactive effects - over other specifications, and this is robust to the choice of financial development indicators, samples and forecast horizons. Our results underscore the urgent need for a reduction of transfer costs, so as to encourage both migrant workers and their beneficiaries to make use of the official channels for sending and receiving remittances in the region.