Deficit financing and Economic Growth: Evidence from Sub-Sahara African Countries

Abstract

In view of the growing controversy on financing of budget deficits, this study investigates the implications of deficit financing in the Sub-Sahara African countries and how it has impacted on their growth rate. Specifically, it looked at how domestic debt, external debt, external reserves, and budget deficit affects real gross domestic product (RGDP). The study utilized panel data gotten from the statistics databank of the various Central Banks in the Sub-Sahara region and the development indicators of the World Bank for period 1986 - 2021; thus, giving a total observation of 144. The Hausman statistics gave the panel fixed effect regression technique as the most appropriate analytical method, which revealed short run relationship at the 5% significant level. From the result of the study, both external reserves and domestic debt are positive and significant to gross domestic product; external debt is negative and insignificant to gross domestic product; while budget deficit is negative and insignificant to gross domestic product. In conclusion, deficit financing affects the growth rate of most Sub-Sahara African economies. The study recommends among others that both fiscal and monetary agencies of the Sub-Sahara countries should maintain optimum level of domestic debt as it is one of the mechanisms for economic growth. Also, is the enforcement of economic policies to aid increase in external reserves.