Impact of Fiscal Policy on Financial Development in Sub-Sahara Africa

Abstract

Economic theory suggests that fiscal policies affect economic growth with extant studies proving this relationship in the context of countries in sub-Sahara Africa (Durusu-Ciftci et al., 2017). However, few studies have examined how fiscal policy impacts financial development leading to economic growth. The study, therefore, sought to examine how fiscal policies affect financial sector development in sub-Sahara Africa and to provide empirical support or otherwise to the conclusions of theory. Adopting the Fixed Effect (FE) estimator, the study on one hand revealed a positive significant relationship between fiscal policy and financial development and that Fiscal Policy influences financial development. Hence, the study showed that the implementation of fiscal policies by governments in SSA directly and positively leads to the financial sector development; thus leading to economic growth. However, the effect of fiscal policy on the financial development does not significantly affect economy growth compared as expected. On policy direction, government should focus on expanding the tax net as a way to increase its revenue and also to stimulate financial development. Again, policies towards financial inclusion should be aggressively pursued in SSA as these have practical implications for financial sector growth.