Impact of Output Gap, COVID-19, and Governance Quality on Fiscal Space in Sub-Saharan Africa

Katuka, Blessing and Mudzingiri, Calvin (2023): Impact of Output Gap, COVID-19, and Governance Quality on Fiscal Space in Sub-Saharan Africa. Published in: Economies , Vol. 11, No. 256 (13 October 2023): pp. 1-20.

Abstract

This study examined the determinants of fiscal space within the Sub-Saharan Africa(SSA) region, utilising a panel of 33 countries from 2005 to 2021. The paper applied the panel threshold, difference, and system generalised method of moments (GMM) regression techniques. The empirical results found evidence of constrained fiscal space and poor governance in Central, Western, and Eastern Africa. The results further unveiled that an enhancement in governance indicators beyond −0.23 for the governance index, −0.15 for control of corruption, −0.98 for the rule of law, −0.37 for regulatory quality, −0.15 for voice and accountability, +0.36 for political stability, and −0.61 for government effectiveness, respectively, increase fiscal space. Moreover, the study concluded that the output gap, COVID-19, trade openness, and economic growth impact fiscal space availability in Central, Western, Southern, and Eastern Africa. The paper investigated whether the COVID-19 pandemic and governance quality significantly influenced fiscal space within SSA. We strongly recommend enhancement in all facets of governance through comprehensive restructuring of governance policies across all SSA countries. Another key recommendation is fostering trade openness to expand tax revenue generation and broaden the tax base, thereby providing the continent with greater fiscal space and improved resilience to unforeseen shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: de facto fiscal space; output gap; governance quality; COVID-19 pandemic; panel threshold regression; Hamilton regression filter
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General

References

(Abdi and Williams 2010) Abdi, Hervé, and Lynne J. Williams. 2010. Principal Component Analysis. Wiley Interdisciplinary Reviews: Computational Statistics 2: 433–59. https://doi.org/10.1002/wics.101.

(Aizenman and Jinjarak 2010) Aizenman, Joshua, and Yothin Jinjarak. 2010. De Facto Fiscal Space and Fiscal Stimulus: Definition and Assessment. 16539.

(Aslam et al. 2022) Aslam, Aqib, Samuel Delepierre, Raveesha Gupta, and Henry Rawlings. 2022. Revenue Mobilization in Sub-Saharan Africa during the Pandemic. Special Series on COVID-19. Washington, DC: International Monetary Fund.

(Aslan 2022) Aslan, Okan. 2022. Determinants of Fiscal Space: An Empirical Analysis for OECD Countries. Ankara: Hacettepe University Graduate School of Social Sciences.

(Assa 2018) Assa, Boka Stéphane Kévin. 2018. Foreign Direct Investment, Bad Governance and Forest Resources Degradation: Evidence in Sub-Saharan Africa. Economia Politica 35: 107–25. https://doi.org/10.1007/s40888-017-0086-y.

(Bah et al. 2021) Bah, Mamadou, Henri Atangana Ondoa, and Koffi Délali Kpognon. 2021. Effects of Governance Quality on Exports in Sub-Saharan Africa. International Economics 167: 1–14. https://doi.org/10.1016/j.inteco.2021.05.003.

(Bekana 2023) Bekana, Dejene Mamo. 2023. Governance Quality and Financial Development in Africa. World Development Sustainability 2: 100044. https://doi.org/10.1016/j.wds.2023.100044.

(Bernheim 1989) Bernheim, B. Douglas. 1989. A Neoclassical Perspective on Budget Defcits. Journal of Economic Perspectives 3: 55–72.

(Blundell and Bond 1998) Blundell, Richard, and Stephen Bond. 1998. Initial Conditions and Moment Restrictions in Dynamic Panel Data Model. Journal of Econometrics 87: 115–43.

(Botev et al. 2016) Botev, Jarmila, Jean-Marc Fournier, and Annabelle Mourougane. 2016. A Re-Assessment of Fiscal Space in OECD Countries. 1352. OECD Economics Department Working Paper. Paris: OECD. https://doi.org/http://dx.doi.org/10.1787/fec60e1b-en.

(Endris Mekonnen and Amede 2022) Endris Mekonnen, Ebrahim, and Andualem Kassegn Amede. 2022. Food Insecurity and Unemployment Crisis under COVID-19: Evidence from Sub-Saharan Africa. Cogent Social Sciences 8: 2045721. https://doi.org/10.1080/23311886.2022.2045721.

(Fund for Peace 2021) Fund for Peace. 2021. Fragile States Index Annual Report 2021. https://fragilestatesindex.org/wp-content/uploads/2021/05/fsi2021-report.pdf

(Ghosh et al. 2013) Ghosh, Atish R., Jun I. Kim, Enrique G. Mendoza, Jonathan D. Ostry, and Mahvash S. Qureshi. 2013. Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies. The Economic Journal 123: F4–F30. https://doi.org/10.1111/ecoj.12010.

(Gnangnon and Brun 2020) Gnangnon, Sèna Kimm, and Jean-François Brun. 2020. Tax Reform and Fiscal Space in Developing Countries. Eurasian Economic Review 10: 237–65. https://doi.org/10.1007/s40822-019-00135-z.

(Hamilton 2018) Hamilton, James. 2018. Why You Should Never Use the Hodrick-Prescott Filter. The Review of Economics and Statistics 100: 28–248.

(Hammadi et al. 2019) Hammadi, Amine, Marshall Mills, Nelson Sobrinho, Vimal Thakoor, and Ricardo Velloso. 2019. A Governance Dividend for Sub-Saharan Africa? WP/19/1. Washington, DC: International Monetary Fund.

(Heller 2005) Heller, Peter S. 2005. Understanding Fiscal Space. IMF Policy Discussion Paper 05/4. Washington, DC: International Monetary Fund. (Ibrahim et al. 2015) Ibrahim, Muazu, Emmanuel Kumi, and Thomas Yeboah. 2015. Greasing or Sanding the Wheels? Effect of Corruption on Economic Growth in Sub-Saharan Africa. African J of Economic and Sustainable Development 4: 157–73.

(Kaiser 1974) Kaiser, Henry F. 1974. An Index of Factorial Simplicity. Psychometrika 39: 31–36. https://doi.org/10.1007/BF02291575.

(Kaufmann et al. 2010) Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2010. The Worldwide Governance Indicators : A Summary of Methodology, Data and Analytical Issues. Hague Journal on the Rule of Law 3: 220–46.

(Ko 2020) Ko, Hyejin. 2020. Measuring Fiscal Sustainability in the Welfare State: Fiscal Space as Fiscal Sustainability. International Economics and Economic Policy 17: 531–54. https://doi.org/10.1007/s10368-019-00453-2.

(Kose et al. 2017) Kose, M. Ayhan, Sergio Kurlat, Franziska Ohnsorge, and Naotaka Sugawara. 2017. A Cross-Country Database of Fiscal Space , Working Paper, No. 1713, Koç UniversityTÜSİAD Economic Research Forum (ERF), Istanbul

(Kose et al. 2012) Kose, M. Ayhan, Sergio Kurlat, Franziska Ohnsorge, and Naotaka Sugawara. 2022. A Cross-Country Database of Fiscal Space. Journal of International Money and Finance 128: 102682. https://doi.org/10.1016/j.jimonfin.2022.102682.

(Kraay et al. 2010) Kraay, Aart, Daniel Kaufmann, and Massimo Mastruzzi. 2010. The Worldwide Governance Indicators: Methodology and Analytical Issues. Policy Research Working Papers. Washington, DC: The World Bank. https://doi.org/10.1596/1813-9450-5430.

(Mawejje and Odhiambo 2020) Mawejje, Joseph, and Nicholas M. Odhiambo. 2020. The Determinants of Fiscal Deficits: A Survey of Literature. International Review of Economics 67: 403–17. https://doi.org/10.1007/s12232-020-00348-8.

(Musavengane et al. 2019) Musavengane, Regis, Pius Siakwah, and Llewellyn Leonard. 2019. ‘Does the Poor Matter’ in pro-Poor Driven Sub-Saharan African Cities? Towards Progressive and Inclusive pro-Poor Tourism. International Journal of Tourism Cities 5: 392–411. https://doi.org/10.1108/IJTC-05-2019-0057.

(Ostry et al. 2010) Ostry, Jonathan, Atish Ghosh, Jun Kim, and Mahvash Qureshi. 2010. Fiscal Space. IMF Staff Position Notes. SPN/10/11. Washington, DC: International Monetary Fund, vol. 2010. https://doi.org/10.5089/9781455228010.004.

(Romer and Romer 2019) Romer, Christina D., and David H. Romer. 2019. Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why. Brookings Papers on Economic Activity. Washington, DC: Brookings, vol. 2019. https://doi.org/10.1353/eca.2019.0003.

(Roy et al. 2007) Roy, Rathin, Antoine Heuty, and Emmanuel Letouze. 2007. Fiscal Space for What? Analytical Issues from a Human Development Perspective. In Fiscal Space: Policy Options for Financing Human Development. London: Routledge. https://doi.org/10.4324/9781849771344.

(Sabir and Qamar 2019) Sabir, Samina, and Meshal Qamar. 2019. Fiscal Policy, Institutions and Inclusive Growth: Evidence from the Developing Asian Countries. International Journal of Social Economics 46: 822–37. https://doi.org/10.1108/IJSE-08-2018-0419.

(Seo et al. 2019) Seo, Myung Hwan, Sueyoul Kim, and Young-Joo Kim. 2019. Estimation of Dynamic Panel Threshold Model Using Stata. The Stata Journal: Promoting Communications on Statistics and Stata 19: 685–97. https://doi.org/10.1177/1536867X19874243.

(World Bank 2021) World Bank. 2021. Global Economic Prospects, January 2021: COVID-19 Crisis Update. Washington, DC: World Bank. Available online: http://hdl.handle.net/10986/34710 (accessed on 25 August 2023).

(Yohou 2023) Yohou, Hermann D. 2023. Corruption, Tax Reform and Fiscal Space in Emerging and Developing Economies. The World Economy 46: 1082–18.

(Zandi et al. 2012) Zandi, Mark, Xu Cheng, and Tu Packard. 2012. Fiscal Space. Avaliable online: https://www.economy.com/mark-zandi/documents/2011-12-13-fiscal-space.pdf.