| dc.description.abstract | Financing fiscal deficit in any country is undertaken with the sole purpose of promoting
economic growth and development. However, fiscal deficit financing can be a major
source of macroeconomic instability, especially inflation, depending on how it is
achieved. Inflation in sub-Saharan Africa has persistently been high, almost double-digit,
and volatile compared to other areas with developing countries such as Asia and Latin
America. Thus, this study aimed at analyzing the relationship between fiscal deficit
financing and inflation among sub-Saharan African countries and determine whether the
inflation rate depends on the mode of financing adopted. This study's initial analysis
determined the relationship between fiscal deficit financing and inflation while
disaggregating deficit financing into domestic and foreign borrowing. This analysis
applied a two-step system Generalized Method of Moments model to the secondary panel
data for 44 sub-Saharan African countries from 2005 to 2020. In its second analysis stage,
this study checked whether the mode of deficit financing selected by the country matters
on the inflation level. The quantity scaling analysis determined the relative effect of fiscal
deficit financing tools on inflation. The findings of this study reveal that financing fiscal
deficit through foreign and domestic borrowing positively influences inflation among sub Saharan African countries, and the severity of the effects on inflation differs between
domestic and foreign borrowing. Foreign borrowing was found to have less impact on
increasing price levels than domestic borrowing. This is indicated by the domestic
borrowing's scaling quantity analysis value of 0.210 against 0.105 for foreign borrowing.
Similarly, this study found that one-year lagged inflation, official development assistance,
gross domestic product, change in money supply and exchange rate have positive effect
on inflation although the effect of the money supply and exchange rate were insignificant.
On the other hand, real interest rates and capital formation were found to have a negative
effect on inflation as well. The robustness of the test for the obtained results was checked
in two ways as follows: First, the two-step system GMM analysis was conducted on the
whole sample of 44 sub-Saharan African countries as well as on a sub-group of 20 low
and 24 middle-income countries within the region to see whether the results obtained vary
on splitting the data. In all estimation models, the results obtained show consistency across
all groups of countries in terms of the coefficient sign, size, and significance level,
implying that the estimated results are highly robust. Following the findings, this study
recommends control of the fiscal deficit through prudent fiscal policies that minimize
resource wastage and reduce the fiscal deficit. Second, the study recommends a reduction
of domestic debt as a component of public debt to achieve macroeconomic goals at a lower
cost to society through less inflation effect. Third, following the negative relationship
between real interest rate, capital formation and inflation, the current study recommends
sub-Saharan African countries to increase capital formation (domestic investment) and
interest rate to achieve macroeconomic stability. | en_US |
