Institutional quality and fiscal deficit in Sub Saharan Africa

Abstract

This study investigates the relationship between institutional quality and fiscal deficits in Sub-Saharan Africa (SSA). The key inquiries addressed in this research focus on the extent to which the quality of government institutions affects fiscal deficits and the persistent trend of budget deficits in Sub-Saharan Africa. A Fixed Effects Method was employed on a panel of 26 countries of Sub-Saharan Africa across a 15-year period (2005-2020). Results revealed that control of corruption, with a coefficient of -3.070 significantly reduced fiscal deficits. Additionally, government effectiveness decreased the fiscal deficit by approximately 2.769 units. Conversely, the study revealed that an augmentation in voice and accountability was associated with a rise in the deficit by approximately 1.658 units. Similarly, an elevation in the enforcement of the law is linked to an increase in the budget deficit by 8.038 units. Imports, government expenditure and government revenue significantly increase fiscal deficits. The study advocates for open budget preparation, execution, and reporting, which requires disclosure of information about the budget process. The study recommends clarity of roles and responsibilities with respect to the structure and functions of different levels of government, efficient tax policies, and anti-corruption policies which target all forms of corruption. Such a balanced approach that harmonizes governance reforms with economic strategies will curb fiscal imbalances. These economic reforms should consider both internal factors such as political, historical, cultural background and external factors such as global economic conditions, international aid, and trade relationships that play significant roles in shaping the economy and good governance. The study further concludes that improved institutional quality could be one of Africa’s most significant milestones to better fiscal management, sustainable, and inclusive economic development