Natural resource endowment and output growth: How crucial is deficit financing in managing resource-rich African economies?

Abstract

The recent crash in the international crude oil price and the fluctuations in the price of gold force oil-net-exporting and gold-producing African countries into recession, thereby necessitating the government to budget for the deficit to cater for the revenue inadequacy. To this end, this study examines the role of deficit finance in the economy of natural resource-abundant nations in Africa to provide an alternative explanation to the resource curse and Dutch disease syndromes. We use the fully modified ordinary least squares as the technique of estimation, and results show that natural resources positively impact output growth in Angola, Egypt, Nigeria, and Tanzania, while they negatively affect output growth in South Africa. Also, in Egypt, Tanzania, and South Africa, Dutch disease is not a problem as the exchange rate negatively affects output growth, while it is a problem in Angola and Nigeria. Lastly, deficit financing positively enhances output growth only in Angola and South Africa, while it is significant only in both Tanzania and Angola. We, therefore, recommend that South Africa should utilise its positive fiscal stance to augment the adverse effect of its natural resources on output growth, while Egypt, Nigeria, and Tanzania should source more funds from external sources to finance deficits and improve the efficiency of fiscal deficits on output growth.