Fiscal Rules, Fiscal Space and Debt Sustainability for Macroeconomic Stability in Sub-Saharan Africa

Nandelenga, Martin Wafula

Fiscal Rules, Fiscal Space and Debt Sustainability for Macroeconomic Stability in Sub-Saharan Africa

Doctoral Thesis

2021

Abstract

This dissertation investigates the role of fiscal rules for fiscal space, debt sustainability dynamics, and macroeconomic stability in economies of Sub-Saharan Africa (SSA). It is motivated on the premise that fiscal policy plays a primary role in a country's policy undercurrents, and that fiscal rules can enhance fiscal effectiveness and sustainability. Chapter one introduces fiscal rules, fiscal space, and debt sustainability in SSA and examines the macroeconomic effects of fiscal rules on fiscal policy and their contribution to macroeconomic stability. The debate on the size of budget deficits and lack of fiscal space has shifted the focus of major macroeconomic adjustments in developed and developing economies to the fiscal sector. The experiences of debt distress and debt relief in SSA in the 1990s and recently in Euro area (Greece), offer a painful reminder of the dangers of a surging debt. The chapter argues that developing countries, particularly in Africa, have had their share of unsustainable budget deficits that have developed into major debt crises, which required subsequent debt relief packages. The concepts of fiscal rules and the space in which they operate, is fundamental for sound debt management and growth outcomes. Chapter two offers both theoretical and empirical literature and lays the foundation for analysis undertaken in the subsequent chapters. The theoretical literature includes the deficit bias, signalling theory, common pool hypothesis, Ricardian Equivalence, time inconsistency preference, debt sustainability and compliance theory on enforcement and management. Chapter three assesses fiscal space in SSA and further develops Aizenman's (2010) approach to fiscal space measurement. This chapter provides a simple but efficient way to measure fiscal space. The chapter estimates fiscal space as a proportion of debt to tax revenue; a measure that gives a significant channel to checking a country's capacity to meet future debt obligations. Chapter four establishes the extent to which the economies of SSA have complied with fiscal rules. A logit model and instrumental variable probit model are used to test compliance rates over the sample period. The results show that both fiscal rules and macroeconomic factors exhibit significant effects on compliance rates. Chapter five uses two stage least squares (2SLS) and a fixed effect model to investigate the effects of fiscal rules on fiscal space in the presence of institutions. The findings suggest that fiscal rules significantly affect fiscal space and the smoothness of fiscal adjustments. It concludes that fiscal space is expanded by enhanced fiscal governance and a reduction of corruption. Chapter six investigates fiscal policy and debt sustainability via a suite of techniques including: the stationarity tests, cointegration tests, Bohn's sustainability test and a Markov-switching regime test for selected SSA economies. The central finding is that fiscal policy has generally been sustainable in SSA for the period 1980-2016, but the results were sensitive to the test used. The debt and fiscal sustainability analysis are heterogeneous across countries. In particular, stationarity tests show that debt is sustainable except for Kenya and Equatorial Guinea. Applying a cointegration framework we find debt to be sustainable across countries. However, the Bohn's sustainability test returns heterogeneous results as Kenya and Nigeria debt is found to be unsustainable. Moreover, we find that Nigeria and Burkina Faso show evidence of fiscal fatigue. Under the Markov-switching framework we also find that debt and fiscal sustainability varies across countries. Nevertheless, the results suggested that the use of fiscal rules improves debt and fiscal sustainability.

Keywords

Economics

Reference:

Collections

PhD / Doctoral

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