Investigating the dynamic relationships between credit supply, economic growth, and the environment: empirical evidence of sub-regional economies in Sub-Saharan Africa.

Abstract

Sub-Saharan Africa (SSA) is considered the most vulnerable to challenges emanating from climate changes. A number of factors notably accelerated changes in growth influence SSA environment. Linking financial sector within growth and environmental outcomes has been the focus of policy makers and researchers. This study investigated the dynamic relationships between credit supply, economic growth, and the environment from the perspectives of the four sub-regional economies (Central, East, Southern, and West African regions) in SSA over the period 1990-2018. In addition, the study tested Environmental Kuznets Curve hypothesis across sub-regions. We employed panel vector autoregressive (panel VAR) model in a generalized method of moment framework to investigate the topic. The panel VAR results revealed that (i) economic growth negatively influence on carbon emissions of Central African countries but not in the East, Southern and West African sub-regions, (ii) credit supply had significantly positive influence on carbon emissions and economic growth of Central and East African sub-regions but negative influence on carbon emissions and economic growth West African sub-regions in SSA, and (iii) carbon emissions had significantly negatively influence on credit supply of East and West African sub-regions. The granger causality results revealed bidirectional causal links between credit supply and carbon emissions, economic growth, and credit supply in the Central and East African sub-regions, while most of the relationships were unidirectional. The impulse response function revealed that the impact of one variable on another vary throughout the periods and across sub-regions. Similarly, the elasticity of the variables to each other varies across sub-regions over the period studied. EKC hypothesis was validated in East African sub-region but was rejected in Central (u-shape relationship), Southern, and West African sub-regional economies indicating variations in growth and environmental outcomes among the sub-regional economies. Specific sub-regional policy recommendations are discussed.