Government Domestic Debt Arrears. Private Investment And Financial Stability Gap In Sub-Saharan Africa

Abstract

The relevance of the private sector in the overall growth of economies in subSaharan Africa (SSA) draws attention to the elements that aid its grov.rth. Provision of credit is of much interest to the government and the private sector since their in vestment acti vities mostly depend on the quantity available. As more credit is given to one of the sectors less will be available to the other. Therefore , defaults on the side of one sector is likely to influence activities in the other sector as well as the operations of the tinancial institutions from vvhich the credits are sourced. This explains the fact that there exists a competition for the credits provided by domestic financial institutions. Considering the contributions o/" financial institutions and the activities of the pri vate sector in achieving overal l economic growth as a basic macroeconomic objecti ve. the relationships between the aforementioned variables are worth investigating. This thesis. addresses three main themes: (a) examining the effect of government domestic debt arrears on private investment; (b) estimating and explain ing the gap in financial stability in SSA; and (c) determining the effect of financial stability gap on private investment. These were achieved using the system General Methods of Moments, Impulse Response Functions. the Stochastic Frontier Analysis and the Fixed and Random Effect estimation techniques. The study revealed that govenunent domestic debt arrears negatively affect private investment in SSA and the subregional communities. The estimated gaps indicate that there are differences in financial stability gaps among SSA countries. Further, financial stability gap beyond a threshold o/" 109.9 percent is found to be detrimental to private investment in SSA.