Reducing the Increasing Effect of Fiscal Expenditure on Government Debts: Does Financial Sector Transparency Matter?
Annotatsiya
ABSTRACT In this study, we attempt to examine how transparency in the financial sector (financial sector transparency or FST) moderates the increasing effect of fiscal expenditure on government debts using 23 African economies over a 16‐year period [Correction made on 28 November 2025, after first online publication: ‘or FST’ was added to the parentheses in this sentence.]. The study employs two‐step dynamic GMM panel models with additional controls for year and country effects. The results show that (i) FST and fiscal expenditure both increase government debts, but the combined effect of these two offers a synergetic‐reducing effect on government debts, (ii) economies with transparent financial sector systems are able to effectively suppress the increasing effect of fiscal expenditure on government debts, and (iii) the increasing effect of expenditure is evident in both transparent and opaque financial sector economies, though the increasing effect of fiscal expenditure is lower in transparent financial sector systems in Africa. These results highlight the important but unexplored government debt‐reducing effect of FST through fiscal expenditure, implying that policymakers can rely on FST to tame the increasing effect of fiscal expenditure on government debts while enacting laws and policies to expand the depth and coverage of FST to harness the government debt‐reducing effect of FST through fiscal expenditure. Related Articles Adegboye, Alex, Kofo Adegboye, Uwalomwa Uwuigbe, Stephen Ojeka, and Eyitemi Fasanu. 2023. “Taxation, Democracy, and Inequality in Sub‐Saharan Africa: Relevant Linkages for Sustainable Development Goals.” Politics & Policy 51(4): 696–722. https://doi.org/10.1111/polp.12547 . Asongu, Simplice, and Nicholas M. Odhiambo. 2023. “The Effect of Inequality on Poverty and Severity of Poverty in Sub‐Saharan Africa: The Role of Financial Development Institutions.” Politics & Policy 51(5): 898–918. https://doi.org/10.1111/polp.12558 . Byaro, Mwoya, Nicholaus Ngowi, and Anicet Rwezaula. 2024. “Do higher government spending, financial development, and trade reduce income inequality in low‐income countries? A Bayesian perspective.” Politics & Policy 52(3): 500‐519. https://doi.org/10.1111/polp.12600 .