Re-evaluating the Fiscal Deficit and Economic Growth Nexus in West Africa: New Evidence from ARDL-PMG Technique

Abstract

Fiscal deficit and declining real GDP growth rate in West Africa are some of the fundamental challenges facing the region. This study examines the impact of fiscal deficit on economic growth in selected West African countries (Ghana, Gambia, Nigeria, Sierra Leone, Burkina Faso, Cote d’Ivoire, Senegal and Guinea-Bissau) from 1991 to 2022. Anchored on the Keynesian fiscal deficit and the endogenous growth theories, the study employs panel Autoregressive Distributed Lag Pooled Mean Group (ARDL-PMG) for the joint dynamic effects. The empirical results indicate that fiscal deficit exerts a positive, statistically significant joint impact on economic growth in the long-run; specifically, a 1 per cent point increase in the fiscal deficit-to-GDP ratio leads to a 0.43 per cent point increase in economic growth. Conversely, human capital development, investment, openness, foreign direct investment and exchange rates are insignificant in both the short run and long run. However, the outcome of the Fully Modified Ordinary Least Squares (FMOLS) robustness check validates the growthenhancing role of most of the control variables, except foreign direct investment. The study concludes that since fiscal deficit can stimulate economic growth, it should be channelled to productive capital investments instead of recurrent expenditure. Hence, the study recommends the implementation of countercyclical fiscal policy, boosting domestic production for export and pursuing deficit-financing that aligns with ECOWAS convergence criteria