Testing the Twin Deficits Hypothesis: Effect of Fiscal Balance on Current Account Balance—A Panel Analysis of Sub-Saharan Africa

Abstract

The twin deficits hypothesis holds if government’s fiscal deficit, through its impact on national saving and consumption, leads to a deterioration of the current account. The fiscal and current account deficits of most countries in Sub-Saharan Africa (SSA) appear relatively large or have been widening over the past several years in the face of positive output growth and steady decline in inflation. Using data for 41 countries from 2000 to 2012, we test the twin deficits hypothesis for SSA. Applying the system Generalised Method of Moments (GMM) estimation technique, the major conclusion drawn from the results indicates that fiscal deficits tend to improve the current account and vice versa, thereby rejecting the twin deficits hypothesis in favor of the twin divergence proposition. The findings, nonetheless, have policy relevance for the region.