Fiscal dominance and inflation: evidence from Sub-Saharan Africa

Hooley, John; Nguyen, Lam; Saito, Mika; Towfighian, Shirin Nikaein

doi:10.3326/pse.48.3.5.

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Fiscal dominance and inflation: evidence from Sub-Saharan Africa*

John Hooley**

Lam Nguyen**

Mika Saito**

Shirin Nikaein Towfighian**

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https://doi.org/10.3326/pse.48.3.5

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Table 2
Sub-Saharan Africa: determinants of central bank lending, 2001-17

	(1)	(2)	(3)	(4)	(5)
Dependent variable: Central bank loans/GDP	Model 1	Model 2	Model 3	Model 4	Model 5
Fiscal deficit	0.1041***	0.0362	0.0409*	0.0216	0.0267
Fiscal deficit	(0.0359)	(0.0254)	(0.0209)	(0.0262)	(0.0220)
Fiscal deficit × Legal limit		0.0046***	0.0053***	0.0055***	0.0062***
Fiscal deficit × Legal limit		(0.0015)	(0.0014)	(0.0019)	(0.0018)
Fiscal deficit × Domestic market development			-0.0639**		-0.0622**
Fiscal deficit × Domestic market development			(0.0284)		(0.0260)
Fiscal deficit × IMF conditionality				-0.0269*	-0.0255**
Fiscal deficit × IMF conditionality				(0.0149)	(0.0123)
Legal limit		-0.0014	0.0007	-0.0036	-0.0018
Legal limit		(0.0317)	(0.0344)	(0.0318)	(0.0343)
Domestic market development			-0.9234**		-0.8080**
Domestic market development			(0.4267)		(0.3835)
IMF conditionality				-0.7964	-0.6888
IMF conditionality				(0.5420)	(0.5166)
Lags of central bank loans/GDP	0.8049***	0.7952***	0.7992***	0.7904***	0.7952***
Lags of central bank loans/GDP	(0.0461)	(0.0381)	(0.0402)	(0.0354)	(0.0368)
Lag of real GDP growth	-0.0163	-0.0223**	-0.0210**	-0.0221**	-0.0209**
Lag of real GDP growth	(0.0115)	(0.0108)	(0.0098)	(0.0112)	(0.0100)
Lag of government deposit/GDP	-0.0737	-0.0811	-0.0952	-0.0735	-0.0873
Lag of government deposit/GDP	(0.0739)	(0.0606)	(0.0640)	(0.0598)	(0.0630)
Lag of government debt/GDP	-0.0100*	-0.0035	-0.0026	-0.0073	-0.0062
Lag of government debt/GDP	(0.0057)	(0.0067)	(0.0070)	(0.0068)	(0.0068)
Observations	667	596	596	596	596
Number of countries	45	41	41	41	41

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Table A1
Sub-Saharan Africa: central bank acts, 2017

Country name	Legal limit	Name of most recent legislation	Year current legislation took effect (last amendment)
Angola	10% of previous year’s revenue	Banco Nacional de Angola Act. Law No. 16/10 15 July	2010
Benin	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Botswana	5% of previous three years’ average revenue	The Bank of Botswana Act. 1996	1997
Burkina Faso	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Burundi	N/A
Cabo Verde	5% of previous year’s revenue	Organic Law of the Bank of Cape Verde, 2002	2002
Cameroon	20% of previous year’s revenue	Charter of the Bank of Central African States, 2010 (CEMAC)	2010
Central African Republic	20% of previous year’s revenue	Charter of the Bank of Central African States, 2010 (CEMAC)	2010
Chad	20% of previous year’s revenue	Charter of the Bank of Central African States, 2010 (CEMAC)	2010
Comoros	20% of previous three years’ average revenue	Statuts de la Banque Centrale des Comoros, 2008	2008
Congo, Democratic Rep. of	0%	Law 005/2002 on the Establishment, Organization, and Operations of the Central Bank of Congo, May 7, 2002	2002
Congo, Republic of	20% of previous year’s revenue	Charter of the Bank of Central African States, 2010 (CEMAC)	2010
Côte d'Ivoire	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Equatorial Guinea	20% of previous year’s revenue	Charter of the Bank of Central African States, 2010 (CEMAC)	2010
Eritrea	N/A
Ethiopia	N/S	Monetary and Banking Proclamation No. 183/1994 and No. 591/2008	1994 (2008)
Gabon	20% of previous year’s revenue	Charter of the Bank of Central African States, 2010 (CEMAC)	2010
Gambia, The	10% of previous year’s revenue	Central Bank of Gambia Act, 2005	2005
Ghana	5% of current year’s revenue	Bank of Ghana Act, 24th January 2002	2002 (2016)
Guinea	5% of previous year’s revenue	Charter of the Central Bank of the Republic of Guinea, 1994	1994 (2017)
Guinea-Bissau	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Kenya	5% of previous year’s revenue	The Central Bank of Kenya Act	1966 (2014)
Lesotho	Net claim is 5% of previous year’s budget	Central Bank of Lesotho Act, 2000	2000
Madagascar	7% of previous year’s revenue	Charter of the Central Bank of Madagascar, 1994	1994 (2016)
Malawi	20% of current year’s revenue	Reserve Bank of Malawi Act - Laws of Malawi (Chapter 44:02), 1989	1989
Mali	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Mauritania	5% of previous year’s revenue	Charter of the Central Bank of Mauritania	2007
Mauritius	10% of current year’s revenue	The Bank of Mauritius Act, 2004	2004 (2015)
Mozambique	10% of previous year’s revenue	Law 1/92 of January 3, 1992	1992
Namibia	25% of previous three years’ average revenue	Bank of Namibia Act, 1997	1997
Niger	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Nigeria	5% of previous year’s revenue	Central Bank of Nigeria Act, 2007	2007
Rwanda	11% of previous year’s government revenue	Law No. 55/2007 of 30/11/2007 Governing the Central Bank of Rwanda	2007
São Tomé and Príncipe	5% of previous year’s revenue	Law 8/92, Organic Law of the Central Bank of STP, 1992	1992
Senegal	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Seychelles	N/S	Central Bank of Seychelles Act, 2004	2004 (2011)
Sierra Leone	5% of previous year’s revenue	Bank of Sierra Leone Act, 2000	2000
South Africa	N/S	South African Reserve Bank Act 90, 1989	1989
Sudan	15% of current year’s revenue	The Bank of Sudan Act, 2002	2002
Swaziland (Eswatini)	20% of previous three years’ average revenue	The Central Bank of Swaziland Order, 1974	1974 (1979)
Tanzania	12.5 % of previous year’s revenue	The Bank of Tanzania Act, 2006	2006 (2010)
Togo	0%	Treaty of the West African Monetary Union (UEMOA)	N/S
Uganda	18% of previous year’s revenue	The Bank of Uganda Statute, 1993	1993 (2010)
Zambia	15% of previous year’s revenue	Bank of Zambia (Amendment) Act, 1998	1998
Zimbabwe	20% of previous year’s revenue	Reserve Bank of Zimbabwe Act (Chapter 22:15)	2010

Notes: N/S indicates not specified in the Central Bank Act, while N/A indicates no Central Bank Act was found in the CBLD database or on the websites of the relevant Central Bank or Ministry of Finance.

Sources: National Authorities; and Central Bank Legislation Database (CBLD).

Table A2
Determinants of central bank lending: treating the fiscal deficit as endogenous

Dependent variable: Central bank loans/GDP	Model 1	Model 2	Model 3	Model 4	Model 5
Fiscal deficit	0.0156	-0.0329	-0.0172	-0.0077	-0.0010
Fiscal deficit	(0.0416)	(0.0415)	(0.0312)	(0.0243)	(0.0207)
Fiscal deficit × Legal limit		0.0066**	0.0053**	0.0056***	0.0053**
Fiscal deficit × Legal limit		(0.0028)	(0.0025)	(0.0021)	(0.0021)
Fiscal deficit × Domestic market development			0.0202		-0.0148
Fiscal deficit × Domestic market development			(0.0555)		(0.0427)
Fiscal deficit × IMF conditionality				-0.0252**	-0.0239**
Fiscal deficit × IMF conditionality				(0.0119)	(0.0107)
Legal limit		0.0098	0.0122	0.0139	0.0043
Legal limit		(0.0185)	(0.0152)	(0.0226)	(0.0210)
Domestic market development			-0.8749***		-0.7560***
Domestic market development			(0.2580)		(0.2244)
IMF conditionality				-0.5713	-0.5919
IMF conditionality				(0.4638)	(0.4116)
Lags of central bank loans/GDP	0.7584***	0.7355***	0.7319***	0.7243***	0.7237***
Lags of central bank loans/GDP	(0.0264)	(0.0315)	(0.0311)	(0.0269)	(0.0275)
Lag of real GDP growth	-0.0143	-0.0130	-0.0146*	-0.0163	-0.0166*
Lag of real GDP growth	(0.0106)	(0.0100)	(0.0087)	(0.0102)	(0.0093)
Lag of government deposit/GDP	-0.0248	-0.0328	-0.0356	-0.0265	-0.0264
Lag of government deposit/GDP	(0.0443)	(0.0341)	(0.0314)	(0.0270)	(0.0270)
Lag of government debt/GDP	-0.0022	0.0057**	0.0059**	0.0051**	0.0042**
Lag of government debt/GDP	0.0156	-0.0329	-0.0172	-0.0077	-0.0010
Observations	667	596	596	596	596
Number of countries	45	41	41	41	41

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Table A3
Determinants of central bank lending: total claims

Dependent variable: Central bank claims/GDP	Model 1	Model 2	Model 3	Model 4	Model 5
Fiscal deficit	0.1449***	0.0375*	0.0398*	0.0274	0.0298
Fiscal deficit	(0.0460)	(0.0228)	(0.0210)	(0.0245)	(0.0230)
Fiscal deficit × Legal limit		0.0037**	0.0038**	0.0044**	0.0046**
Fiscal deficit × Legal limit		(0.0015)	(0.0016)	(0.0020)	(0.0020)
Fiscal deficit × Domestic market development			-0.0184		-0.0187
Fiscal deficit × Domestic market development			(0.0373)		(0.0355)
Fiscal deficit × IMF conditionality				-0.0183	-0.0181
Fiscal deficit × IMF conditionality				(0.0153)	(0.0135)
Legal limit (measured in percent of revenue)		0.0339	0.0384	0.0320	0.0359
Legal limit (measured in percent of revenue)		(0.0382)	(0.0390)	(0.0404)	(0.0410)
Domestic market development			-0.6718		-0.5889
Domestic market development			(0.4664)		(0.4591)
IMF conditionality				-0.6187	-0.5315
IMF conditionality				(0.6402)	(0.6146)
Lags of central bank claims/GDP	0.8974***	0.8269***	0.8272***	0.8240***	0.8251***
Lags of central bank claims/GDP	(0.0752)	(0.0360)	(0.0374)	(0.0335)	(0.0348)
Lag of real GDP growth	-0.0270	-0.0254	-0.0235	-0.0270	-0.0252
Lag of real GDP growth	(0.0174)	(0.0206)	(0.0192)	(0.0211)	(0.0195)
Lag of government deposit/GDP	-0.0839	-0.0733	-0.0786	-0.0704	-0.0756
Lag of government deposit/GDP	(0.0768)	(0.0626)	(0.0634)	(0.0643)	(0.0652)
Lag of government debt/GDP	-0.0148**	-0.0105	-0.0103	-0.0129*	-0.0125
Lag of government debt/GDP	(0.0068)	(0.0078)	(0.0080)	(0.0077)	(0.0078)
Observations	667	596	596	596	596
Number of countries	45	41	41	41	41

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Table A4
Determinants of central bank lending: change in central bank loans

Dependent variable: Change in Central bank loans/GDP	Model 1	Model 2	Model 3	Model 4	Model 5
Fiscal deficit	0.6263**	0.0935	0.1016	-0.0331	-0.0253
Fiscal deficit	(0.3038)	(0.2369)	(0.2366)	(0.2522)	(0.2538)
Fiscal deficit × Legal limit		0.0415***	0.0441***	0.0540***	0.0565***
Fiscal deficit × Legal limit		(0.0159)	(0.0157)	(0.0205)	(0.0200)
Fiscal deficit × Domestic market development			-0.1821		-0.1929
Fiscal deficit × Domestic market development			(0.3505)		(0.3321)
Fiscal deficit × IMF conditionality				-0.2427*	-0.2372**
Fiscal deficit × IMF conditionality				(0.1256)	(0.1150)
Legal limit		0.6758	0.6126	0.5591	0.4772
Legal limit		(0.5628)	(0.5009)	(0.4962)	(0.4424)
Domestic market development			3.9462		4.9117
Domestic market development			(5.6728)		(4.9638)
IMF conditionality				-8.8235	-9.2823
IMF conditionality				(6.8652)	(6.9630)
Lags of change in central bank loans/GDP	-0.1952**	0.0203	0.0146	0.0052	-0.0022
Lags of change in central bank loans/GDP	(0.0942)	(0.0628)	(0.0677)	(0.0632)	(0.0689)
Lag of real GDP growth	-0.1873	-0.2062	-0.1960	-0.2132	-0.2001
Lag of real GDP growth	(0.1644)	(0.2083)	(0.2150)	(0.2213)	(0.2274)
Lag of government deposit/GDP	-1.1335*	-0.8138*	-0.7709*	-0.7390	-0.6889
Lag of government deposit/GDP	(0.6185)	(0.4752)	(0.4557)	(0.4700)	(0.4486)
Lag of government debt/GDP	-0.0873*	-0.0132	-0.0059	-0.0373	-0.0280
Lag of government debt/GDP	(0.0468)	(0.0818)	(0.0852)	(0.0753)	(0.0771)
Observations	629	561	561	561	561
Number of countries	45	41	41	41	41

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Table A5
Determinants of central bank lending: additional explanatory variables

Dependent variable: Central bank loans/GDP	Model 1	Model 2	Model 3
Fiscal deficit	0.0370	0.0734*	0.0752*
Fiscal deficit	(0.0253)	(0.0394)	(0.0400)
Fiscal deficit × Legal limit	0.0046***	0.0056**	0.0056**
Fiscal deficit × Legal limit	(0.0015)	(0.0022)	(0.0022)
Fiscal deficit × Domestic market dvpt+Eurobond access	-0.0358		-0.0887
Fiscal deficit × Domestic market dvpt+Eurobond access	(0.0778)		(0.1133)
Fiscal deficit × Sovereign risk		-0.0054	-0.0054
Fiscal deficit × Sovereign risk		(0.0042)	(0.0042)
Legal limit	-0.0013	-0.0181	-0.0172
Legal limit	(0.0321)	(0.0470)	(0.0474)
Domestic market dvpt+ Eurobond access	0.1744		0.6700
Domestic market dvpt+ Eurobond access	(0.6399)		(0.8910)
Sovereign risk		-0.0541	-0.0576
Sovereign risk		(0.1557)	(0.1515)
Lags of central bank loans/GDP	0.7947***	0.7908***	0.7887***
Lags of central bank loans/GDP	(0.0382)	(0.0533)	(0.0533)
Lag of real GDP growth	-0.0221**	-0.0207	-0.0204
Lag of real GDP growth	(0.0108)	(0.0145)	(0.0147)
Lag of government deposit/GDP	-0.0805	-0.1272	-0.1242
Lag of government deposit/GDP	(0.0605)	(0.0888)	(0.0885)
Lag of government debt/GDP	-0.0034	-0.0023	-0.0023
Lag of government debt/GDP	(0.0066)	(0.0068)	(0.0066)
Observations	596	443	443
Number of countries	41	35	35

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Notes: Sovereign risk measures the risk of debt distress using the ratings from the IMF’s Debt Sustainability Analysis (=0 if the rating is “Low”; =1 if the rating is “Moderate”=2 if the rating is “High”=3 if the rating is “In debt distress”). Eurobond access is a dummy (=1 if the country has previously issued a Eurobond, 0 otherwise).

Table A6
Determinants of central bank lending: dynamic bias least squares dummy estimators

Dependent variable: Central bank loans/GDP	Model 1	Model 2	Model 3	Model 4	Model 5
Fiscal deficit	0.0833***	0.0050	0.0085	-0.0007	0.0031
Fiscal deficit	(0.0173)	(0.0210)	(0.0211)	(0.0208)	(0.0208)
Fiscal deficit × Legal limit		0.0037***	0.0040***	0.0047***	0.0050***
Fiscal deficit × Legal limit		(0.0012)	(0.0013)	(0.0013)	(0.0013)
Fiscal deficit × Domestic market development			-0.0464*		-0.0469*
Fiscal deficit × Domestic market development			(0.0243)		(0.0242)
Fiscal deficit × IMF conditionality				-0.0336***	-0.0314**
Fiscal deficit × IMF conditionality				(0.0126)	(0.0127)
Legal limit		-0.0149	-0.0166	-0.0179	-0.0192
Legal limit		(0.0264)	(0.0265)	(0.0262)	(0.0263)
Domestic market development			0.0921		0.1098
Domestic market development			(0.2347)		(0.2330)
IMF conditionality				-0.1878	-0.2600
IMF conditionality				(0.1926)	(0.1933)
Lags of central bank loans/GDP	0.7609***	0.7748***	0.7716***	0.7741***	0.7707***
Lags of central bank loans/GDP	(0.0233)	(0.0173)	(0.0176)	(0.0172)	(0.0175)
Lag of real GDP growth	-0.0250	-0.0217*	-0.0195	-0.0209*	-0.0187
Lag of real GDP growth	(0.0157)	(0.0123)	(0.0123)	(0.0122)	(0.0122)
Lag of government deposit/GDP	-0.0218	-0.0397*	-0.0381*	-0.0389*	-0.0370*
Lag of government deposit/GDP	(0.0231)	(0.0206)	(0.0209)	(0.0205)	(0.0207)
Lag of government debt/GDP	-0.0010	-0.0018	-0.0014	-0.0036*	-0.0032
Lag of government debt/GDP	(0.0027)	(0.0021)	(0.0021)	(0.0021)	(0.0022)
Observations	667	596	596	596	596
Number of countries	45	41	41	41	41

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, *p<0.1.

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