Budget Deficit and Macroeconomic Variables in Sierra Leone: An Econometric Approach

Abstract

Budget deficit has become an increasingly serious problem for Sierra Leone due to unsound public expenditures, system of government, tax evasion and weak policy coordination between the fiscal and monetary authorities. This study presents an investigation into the relationship between budget deficit and few macroeconomic variables in Sierra Leone using time series data for a period of 34 years (1980-2014). The study follow an econometric approach to derive the long run and short run relationships in which the Johansen’s test of co-integration, vector error correction model (VECM) and the granger causality test techniques were employed. Results from the long run relationship show that exchange rate, gross domestic product and money supply have a negative and significant relationship with budget deficit whereas interest rate and inflation have a positive one, though interest rate is insignificant in the long run. The short run results are consistent with results from the long run except for exchange rate. Results from the granger causality test confirm causal link between exchange rate, gross domestic product, inflation, money supply and budget deficit. Policy recommendation call for solid policy coordination between the monetary authorities and fiscal authorities in Sierra Leone to instill closely controlled and efficient budgetary planning, taxation and public sector spending.

Keywords: Budget Deficit, Macroeconomic Variables, Econometric, Johansen’s Co-integration, Vector Error Correction, Granger Causality.