DEFICIT FINANCING AND ECONOMIC GROWTH IN SUB-SAHARAN AFRICA

ABSTRACT

This study carried out an in-depth investigation of the effects of deficit financing on economic growth in the Sub-Sahara African countries, using Cameroon, Kenya, Nigeria and South Africa as the sample size. The longitudinal research design was used since the data obtained for the variables of the study covered a timeframe of 35 years - spanning from 1986 to 2020. Real GDP denoting economic growth served as the dependent variable, while government budget deficit, government domestic debt, government external debt, government external reserves, and broad money supply represented the explanatory variables. Both the fully modified ordinary least squares and panel regression methodologies were deployed to analyze the study’s data. Some of the findings of the study showed that all the variables became stationary at first difference and that there existed a long run relationship among the study’s variables. The random effect results which emanated from the panel regression exercise showed that domestic debt exerted positive and significant impacts on economic growth in Cameroon, Kenya, Nigeria and South Africa, respectively. External debt exerted positive and significant impacts on economic growth in Kenya and Nigeria but affected economic growth in Cameroon and South Africa negatively. External reserves also impacted economic growth positively in Kenya and Nigeria but it affected economic growth negatively in Cameroon and South Africa. Based on the foregoing findings, the study concluded that deficit financing still remains the best option for attaining the much desired rapid and sustainable economic growth in the Sub-Saharan Africa provided the proceeds of the borrowed loans are deployed to those infrastructural and productive facilities that are likely to generate future streams of income that would augment domestic savings that are largely perceived to drive industrialization. It is therefore strongly recommended that policy makers in the Sub Sahara African countries should ensure that state-owned enterprises borrow through government guarantees to execute those critical projects (such as the construction of long bridges, standard gauge railway systems, etc) that are most likely to yield future streams of income that would facilitate industrialization and, invariably, accelerated and sustainable economic growth. The governments should also maintain optimum levels of foreign debt as evidence has shown that excessive external debt service payments hinder the abilities of the borrowing countries to pursue meaningful economic growth agenda. When these recommendations are considered and implemented, the Sub Sahara African countries would no doubt become key players in the global economy. This study widens our horizon on the efficacy of deficit financing in improving the state of the Sub-Sahara African economy.

Keywords: Deficit Financing, Economic Growth, External Debt, Domestic Debt, Budget Deficit, Broad Money Supply, External Reserves.