Investigations into therecently widening global imbalance mostly, as it affects the historicallygrowing current account deficits of most economies has become a pervading trendand has attracted sufficient traction and exposition in international economicsdebate.
In this, an expanding theoretical and empirical interest has beendeveloped regarding the impact of current account deficits especially, indeveloping economies. The current account position is a critical pointer to thedirection of an economy, thus, playing crucial roles and guiding policy makers’analysis of past and present economic trends and has contributed to the alreadyheated debate on the impact of globalisation on developing economies. This isbecause unlike developed economies, developing economies face severe creditconstraints such that the behaviour of their current account is largely drivenby external shocks due to their dependence on foreign credit markets (Calderonet al.
, 2002).Large and persistent currentaccount deficit holds serious implications for an economy for several reasons,some of which may be directly or indirectly viewed as indications of potentialmacroeconomic imbalance. Within the national income identity, the currentaccount position offers a direct image of a country’s savings – investmentlinkages, indirectly revealing the level of fiscal deficit as well as privatesavings, which are leading factors that determine the level of growth in aneconomy. On the external sphere, it is a direct reflection of a country’s totaltransaction with the rest of the world on the international market for goodsand services and indirectly shows the country’s stock of claims and liabilitywith the rest of the world (Aristovnik, 2007). As shown in figure 1 above, thecurrent account deficit of most Sub-Saharan African economies are high byhistorical standards in comparison with other developing economies. On theaverage, the economies in our sample failed to keep their current accountdeficit within the 5% benchmark. From the period 1980 to 2015, the average ofcurrent account deficit in these economies stood at approximately 6.
2 percentof GDP. Throughout this period, countries such as Kenya, Senegal, Burkina Faso,Tanzania, Mozambique and Madagascar never witnessed current account surplus. Evenmore, over the last decade, current account deficit has risen given theinability of these economies to resist external trade shocks during thisperiod. For instance, between 2007 and 2015, the average current accountdeficit rose to approximately, 8% of GDP in these economies. Consequently, current accountdynamics has been given fresh attention following the recent global financialcrisis 2007-2009 and global imbalances in most developed economies. A lot ofliterature has been dedicated to different dimensions of this issue with mosteconometric results reflecting doubts concerning the sustainability of thecurrent account deficits of many developing economics (see e.
g., Brissimis etal., 2010). Instead, we build on the argument of Herrman and Jochem (2005) andquestion whether the current deficit will decrease over time followingadjustments of strategic macroeconomic variables such as government spending,private consumption, inflation rate, financial reforms index, public andprivate investment and the real exchange rates. Being aware of lessons fromliterature concerning the response of current account to external shocks, we alsocontrol for external factors such as the level of economic integration and thepresent stage of development in most sub-Saharan Africa. Against this background, themain objective of this paper is to examine the development of current accountbalance in Sub-Saharan Africa. To do this, we construct and estimate suitableempirical models using a representative panel of fourteen countries drawn fromdifferent regions in Africa.
Our analysis spans through a period of 26 years(1990 – 2015) and aims to examine the profile and development of the currentaccount deficit of the selected economies while the econometric analysis aimsat revealing the fundamental macroeconomic, financial and external factors thatexplain the behaviour of current account in this economies such as grossdomestic product per capita, government debt, savings, inflation rate, ameasure of financial deepening, reel exchange rate, terms of trade and level ofeconomic integration.Following the introduction,the rest of the paper is organised as follows, the next section examines theprofile and development of current account balance in our selected economies.The third section presents the theoretical framework and a brief survey ofprevious empirical studies while our economic model is specified and thevariables in the model are described with sources of our data and preliminaryanalysis are discussed in the fourth section. Our empirical results arepresented and discussed in the fifth section while the conclusion and thepolicy implication of our findings appear in section six.