CURRENT ACCOUNT SUSTAINABILITY IN SUB-SAHARAN AFRICAN COUNTRIES: A PANEL COINTEGRATION TEST WITH FOURIER COMPONENT

• Main Author: Olaolu Richard Olayeni
• Format: Article
• Language: English
• Published: Juraj Dobrila University of Pula 2018-01-01
• Series: Review of Innovation and Competitiveness
• Online Access: http://hrcak.srce.hr/file/303743

This paper examines the trade account sustainability for sub-Saharan African (SSA) countries over the period 1960-2014. It addresses three important issues econometrically in the sustainability literature: i) nonlinearity, ii) structural breaks and iii) cross-sectional dependence. By incorporating these three stylized facts jointly in the modelling and estimation procedure, we refute the erstwhile view that the SSA countries violate their intertemporal budget constraints and challenge the position that these countries may not be able to control their external imbalances. This puts in perspective that the observed unsustainable current accounts in many of these countries are not necessarily failure to control the imbalances between exports and imports but exogenously driven by policy somersaults leading to mean shifts in relationship. Purpose. The purpose of this paper is premised on the need to understand the reality of current account sustainability among the sub-Saharan African countries, update the understanding since the last papers were published by Arize (2002), Narayan and Narayan (2005) and Razafimahefa and Hamori (2007), and to study the implications of nonlinearity as well as structural breaks. Design/Methodology/Approach. We develop a smooth break stationarity technique that accounts for the unknown number of breaks in the series thereby overcoming the bias due to using sharp structural break stationarity techniques that require predetermined number of break points. In particular, utilize the Fractional Frequency Flexible Fourier Form (FFFFF) and Integer Frequency Flexible Fourier Form (IFFFF). We solve the problem of crosssectional dependence by utilizing bootstrap method. Findings And Implications. Using the methodology outlined above, we find that it seems that the sub-Saharan African countries are unable to tame the divergence between exports and imports not because of any inherent inability but because of the exogenous factors major breaks in policy milieu that threaten their ability to ensure the intertemporal budget constraints are not violated. This puts in perspective that the observed unsustainable current accounts in many of these countries are not necessarily failure to control the imbalances between exports and imports but exogenously driven by policy somersaults leading to mean shifts in relationship. The policy implications therefore include ensuring more tranquil policy environment in the sub-Saharan Africa. Interestingly, lack of stability in policy environment and policy continuity has been one of the most bedeviling problems facing sub-Saharan Africa. Limitations. A major limitation of the present study is that the approach used to investigate is based on unit root testing. Bohn (2007) highlights the limitations of using this approach. However, the literature on sustainability has not seen a significant decline in the number of studies using the approach. Therefore, this study belongs to the class of studies that deduce sustainability from the stationarity property rather than from the error-correction response function.