International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss

Fiscal Deficits and Current Account Imbalances: Evidence from Sierra Leone
Tarawalie Abu Bakarr

This study examines the short and long run relationships between budget and current account deficits in Sierra Leone within the framework of the bounds test approach and Toda Yamamoto (1995) causality analysis. Using annul data for the period 1980-2012, the results reveal that budget deficit, real GDP and political instability (proxy by war dummy) have positive impact on current account deficit in the long run. In addition, the short run estimates show that budget deficit and war dummy were the most significant variables influencing current account deficit in Sierra Leone during the review period. The granger causality tests reveal that, uni-directional causality runs from budget deficit to current account balance and from current account balance to real GDP, with no feedback effect. However, no causality was evident between current account balance and the other explanatory variables. A key lesson of this study is that, policy measures that are able to reduce the budget deficit should be seriously considered by the authorities in order to reduce the trade deficit. This can be achieved through the implementation of sound and prudent fiscal policies aimed at providing incentives to increase revenue mobilization and rationalization of government expenditure.

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