Assessing the Role of Financial Inclusion on Debt Sustainability: Evidence from Sub-Saharan Africa

Abstract

This study examines the impact of financial inclusion on debt sustainability in 37 Sub-Saharan African countries. Using panel data from 2004 to 2022, the study utilized the two-step system Generalized Method of Moments (GMM) estimator to explore how financial inclusion indicators - bank branch penetration, ATM penetration and domestic private credit - affect the primary balance ratio and its interplay with the Debt-to-GDP ratio.  The findings from the study show that higher levels of ATM and bank branch penetration significantly enhance fiscal balances by promoting growth-enhancing activities that generate more tax to government. The findings generally reveal that financial inclusion has a significant positive impact on primary balance ratio, suggesting that access to financial services by households and firms promotes debt sustainability among SSA countries. Similarly, the interactive term for financial inclusion and debt sustainability included in the model indicates that financial inclusion reduces the consequential effect of high debt on fiscal space of SSA countries. This study finds that financial inclusion, facilitated by ATM penetration and bank branch availability, is critical for achieving debt sustainability in sub-Saharan Africa by stimulating economic growth and tax revenues. The authors recommend expanding financial infrastructure and credit access, while suggesting future research use more disaggregated data across all African countries.