Public debt and macroeconomic stability among sub-Saharan African countries: a system GMM test approach

Sumba, Jerry Ogutu; Ochenge, Rogers; Mugambi, Paul; Musafiri, Collins Muimi Article Public debt and macroeconomic stability among sub- Saharan African countries: a system GMM test approach Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Sumba, Jerry Ogutu; Ochenge, Rogers; Mugambi, Paul; Musafiri, Collins Muimi (2024) : Public debt and macroeconomic stability among sub-Saharan African countries: a system GMM test approach, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-16, https://doi.org/10.1080/23322039.2024.2326451 This Version is available at: https://hdl.handle.net/10419/321449 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Public debt and macroeconomic stability among sub-Saharan African countries: a system GMM test approach Jerry Ogutu Sumba, Rogers Ochenge, Paul Mugambi & Collins Muimi Musafiri To cite this article: Jerry Ogutu Sumba, Rogers Ochenge, Paul Mugambi & Collins Muimi Musafiri (2024) Public debt and macroeconomic stability among sub-Saharan African countries: a system GMM test approach, Cogent Economics & Finance, 12:1, 2326451, DOI: 10.1080/23322039.2024.2326451 To link to this article: https://doi.org/10.1080/23322039.2024.2326451 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 26 Mar 2024. Submit your article to this journal Article views: 3553 View related articles View Crossmark data Citing articles: 4 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE Public debt and macroeconomic stability among sub-Saharan African countries: a system GMM test approach Jerry Ogutu Sumba a , Rogers Ochenge b , Paul Mugambi a and Collins Muimi Musafiri c# a Department of Economics, University of Embu, Embu, Kenya; b Department of Economics, Kenyatta University, Nairobi, Kenya; c Cortile Scientific Limited, Nairobi, Kenya ABSTRACT This study examined the effect of public debt on macroeconomic stability among 45 sub-Saharan African (SSA) countries for the period 2005–2022 using the two-step system Generalized Method of Moments (GMM). The study disaggregated public debt into domestic and foreign borrowing and determined the effect of each on inflation and economic growth. In agreement with recent studies, we found compelling evidence of negative effect of both domestic and foreign borrowing on economic growth and a positive effect on inflation among SSA countries. The empirical results reveal that a unit increase in domestic borrowing reduces economic growth by 0.06 percent and raises inflation by about 0.14 percent, while the same increase in foreign borrowing reduces economic growth by 0.01 percent and increases inflation by 0.05 percent holding other factors constant. These results imply that increase in public debt causes macroeconomic instability, and that domestic borrowing has a relatively larger impact on macroeconomic variables compared to foreign borrowing. The policy implication of the current study is that SSA countries should avoid excessive borrowing by operating a fiscal deficit within individual country threshold limits to contain growth in public debt. The SSA countries should also ensure borrowed funds are channeled into projects that bring revenue and other investment opportunities to amortize the debt stock. IMPACT STATEMENT Accumulation of public debt tend to have a negative impact of the countries macroeconomic stability depending on how it is financed. This is common especially in developing countries where different debt instruments among them domesticandforeignborrowingareusedasmeantomobilizefinancialresources for covering budget deficit as well as investment in development projects. This study determines the effect of public debt (domestic and foreign) on main macroeconomic variables (inflation and economic growth) to determine the effect of each tool on the selected variables in sub-Saharan African countries. The results of this study will help the policy makers in choosing appropriate debt instrument to minimize negative effect on macroeconomic stability. ARTICLE HISTORY Received 22 September 2023 Revised 29 January 2024 Accepted 28 February 2024 KEYWORDS Public debt; economic growth; inflation rate; macroeconomic; domestic borrowing; foreign borrowing; system GMM REVIEWING EDITOR Dr Xibin Zhang, Monash University, AUSTRALIA SUBJECTS Economics; Finance; Industry & Industrial Studies Introduction The effect of public debt on major macroeconomic variables such as gross domestic product (GDP) and inflation remains a major global concern among economic policymakers and researchers (Daba Ayana et al., 2023). Over the last decade the concern has picked up due to escalation of public borrowing owing to the need to finance infrastructural project, war and other calamities (Okoye et al., 2019). For instance, during the COVID 19 period, governments intensified borrowing to enhance their economic status and address the vagaries of the pandemic (Weicheng Lian et al., 2020). Prior to the pandemic period, the escalation in public debt particularly in SSA has been attributed need to finance high capital CONTACT Jerry Ogutu Sumba [email protected] Department of Economics, University of Embu, PO BOX 6-60100 Embu, Kenya # Present address: Research Centre for Smallholder Farmers (RCFSF), PO BOX 10451, 30100, Eldoret, Kenya. ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2326451 https://doi.org/10.1080/23322039.2024.2326451 projects such as railways and roads which saw public debt especially external debt increase rapidly (Azolibe, 2022). Although borrowing to finance capital projects has been justified as means to increase capital base and guarantee future income flow to the developing countries, the effect of such action remains the central challange among developing countries. This is so since in some cases borrowed funds have been misappropriated through corruption and embezzlement (Manasseh et al., 2022). As at 2020, out of $92 trillion global public debt, developing countries owe almost 30% of this amount with over 70% of its debt owed to China, Brazil and India (Kharas & Bhattacharya, 2023). The African countries’public debt in particular has increased to $1.8 trillion, a 183% growth since 2010 and four times higher than the GDP growth rate which has been termed to be a significant increase that might have adverse effect on the macroeconomic stability (UNCTAD, 2023). More so, the problem is pronounced in developing countries such as sub-Saharan African where governments have continued to acquire expensive commercial loans issued both locally and from international sources as the quickest means to finance budget deficit (Manasseh et al., 2022). Therefore, assessing the effect of public debt on major macroeconomic variables such as inflation and economic growth in these countries is essential. This study selected inflation and economic growth as the representatives of macroeconomic stability due to their direct effect on peoples’living standards, the purchasing power of the vulnerable group in the society as well as political and economic effect. For instance, political class is likely not to allow undue inflation and declining economic growth since it would affect the voters attitude and government choice during elections (Fasanya et al., 2021). While there are numerous studies that have been conducted on the nexus between public debt and macroeconomic stability, no consistent evidence exist especially on the effect public debt on inflation and economic growth on either positive or negative direction. The results and evidence obtained differ significantly based on the region, analytical model employed and public debt categorization. For example studies such as, Oyeleke (2021) in Nigeria, Ssebulime and Edward (2019) and Aimola and Odhiambo (2021a), in Ghana found a positive relationship between public debt and inflation while others such as Aimola and Odhiambo (2020) found negative relationship between public debt and inflation. Similarly, Tarawalie and Jalloh (2021) study on external debt and economic growth nexus among the Economic Community Of West African States (ECOWAS) member countries using panel corrected standard errors model found no significant relationship between public debt and economic growth. Jama (2021) on the other hand found that increase in public debt increases economic growth in East African countries. The negative relationship between public debt and economic growth has also been reported by Rana and Wahid (2017), Saungweme and Odhiambo (2021) and Afonso and Ibraimo (2020) in Bangladesh, South Africa and Mozambique respectively. The discrepancies in the results obtained from the sampled studies reveal that there is still no consensus on the direction of the relationship between public debt and our selected macroeconomic variables, which formed the basis of the current study. The current study makes the following primary contributions to the existing studies; First, it contributes to existing body of literature on the effect of public debt on the selected macroeconomic variables since their yet to be consensus on actual relationship between these variables. Second, the current study disaggregated the public debt into domestic and foreign borrowing and determined the potential effect of each debt instrument on macroeconomic stability as suggested by Aimola and Odhiambo (2021b). Disaggregating public debt into domestic and foreign debt helps in capturing the effect of individual debt instrument on macroeconomic stability because these variables have varying vulnerability, especially in developing countries where they are used simultaneously (Afonso & Ibraimo, 2020). Third, this study enables policy makers to understand the link between public debt instruments (domestic and foreign debt) and main macroeconomic variables (inflation and GDP growth). Finally, the study used the system-generalized method of moments (GMM) for 45 SSA countries spanning from 2005 to 2022, which updates the stock of available literature using current data set. Public debt, inflation and economic profile in Sub-Saharan African region The debt burden in sub-Saharan African countries has been termed as a major hindrance to growth and development as wells as macroeconomic management (Manasseh et al., 2022). For instance, high debt 2 J.O. SUMBA ET AL. stock in the region has continued to hamper domestic revenue mobilization, which has further led to escalation of debt burden in the region. The region’s public debt profile from 2005 to 2022 can be visualized as shown in Figure 1. Trend analysis over this period is crucial because it represents the time when public debt had a wide range of variation. For example, it is over this period when the Paris Club external debt relief deal and exit from London Club debt obligations were executed between 2005 and 2006, thus considerably reducing debt burden for the member countries (Aimola & Odhiambo, 2021a). As shown in Figure 1, public debt in the sub-Saharan African region shows a declining trend from 36.01% in 2005 to the lowest of 23.2% in 2008, before rising to the highest point of 57% in 2020. Individually, SSA countries public debt profile has a mixture of high and low levels of public debt as a percentage of GDP with more than half of countries having public debt greater than 50% of the GDP. For instance, some countries such as Eretria, Carbo Verde, Mozambique Republic of Congo, Sierra Leone and Zimbabwe have had instances higher public debt of over 90% of the countries’GDP. Countries Eretria, Carbo Verde and Mozambique have also recorded the highest public debt at 163.8%, 127.4% and 104.5% as at 2022. On the other hand, countries such as Democratic republic of Congo, Botswana and Equatorial Guinea have maintained a low public debt profile amounting to 14.6%, 19.9% and 27.1% of the GDP implying that the public debt in the region have a diverse trend (Africa, 2023). Prior to 2005, public debt in most developing countries was characterized by huge external borrowing to meet the governments’financial needs, this led to the overall debt accumulation. The debt stock continued to grow due to capitalization of interest defaults as well as payment of arrears, even when no new loans are acquired. The implementation of the first and second phases of Paris Club debt relief paid which off external debt arrears and reduced external debt stock by almost 33% came as a savior to most developing countries, SSA inclusive. Since 2009, public debt as a percentage of GDP has shown a steady rise. This is mainly due to a shift in countries’borrowing priorities from external to domestic borrowing to meet their financial obligations. Since then, the domestic versus external debt ratio has grown from as low as 11:89 in the early 1990s to 37:63 in 2019 (Heitzig, 2021). The debt problem continues to be a major challenge especially among SSA countries, given that most borrowed funds are misappropriated either through corruption or investing in low-priority projects due to poor governance (Oyeleke, 2021). As pointed out by Daba Ayana et al. (2023), public debt could serve as a major hindrance to macroeconomic performance in SSA characterized by high inflation incidences and low economic growth across countries. The trend in inflation and economic growth in the SSA region from 2005 to 2022 can be visualized is as shown in Figure 2. From this figure, we notice that the two variables seem to have a mix of upward and downward movement with some years’inflation rate rising to double digits’values, while economic growth shrinks to negative values. To start with, the inflation rate, the region has experienced various instances of high inflation rates running to the double-digit figure. For instance, years such 2008, 2012 and 2022 have recorded highest levels of inflation at 10.3%, 6.5% 9.3% Figure 1. Public debt (% of GDP) profile in the sub-Saharan African region. COGENT ECONOMICS & FINANCE 3 respectively with the highest rate being in 2008. The high inflation rate in the region has mainly been due to the adoption of expansionary fiscal policies financed by central banks to cover up the fiscal deficit that has kept unfolding badly by causing macroeconomic instability through rising inflation. Other instances of high inflation, especially between 2007 and 2009, are attributed to the ripple effects of the 2008 global financial crisis, which led to a decline in oil prices and rising global unemployment (Botta, 2020). SSA economic growth trend over the period has also mixed up and downward trends, with some years such as 2020 recording negative growth rates. In general, the rate of economic growth in the region remained very low, with the highest rate being 5.9% in 2010. The low economic growth rate in the region over the years can be attributed to a number of underlying factors, such as low levels of domestic investments, misplaced economic priorities, political instability in some countries, and the recent 2019-2020 COVID 19 pandemic. The COVID 19 pandemic for instance led to lockdowns in most countries which shrunk business operations and global production. This can explain why the region’s economic growth rate was negative in 2020, as most of economies relied on imported goods and materials for consumption and production. The trend analysis of inflation and economic growth in the region shows some level of macroeconomic instability, which needs to be addressed. The rest of this paper is organized as follows; section two provides an overview of the theoretical and empirical literature. Section three presents the study methodology. Section four presents the results of the study and a discussion, and lastly, section five provides the study conclusion and policy recommendations. 2. Theoretical and empirical literature review 2.1. Theoretical literature review Keynesian expenditure theory postulates that public debt is necessary for stimulating aggregate demand and keeping the economy towards a full employment path. In contrast, some economists have argued that increasing taxes is the best way to finance government expenditures. This is however faced with the challenge of reduction in consumers’disposable income, which lowers aggregate demand and general consumption power in the economy (Ribeiro & Lima, 2019). This makes incurring public debt an option for increasing governments’financial resources even though it has a varrying effect on macroeconomic stability. Hilton (2021), suggest that rising public debt adversely affects macroeconomic stability in the following ways: First, acquiring public debt to finance recurrent government expenditure increases aggregate demand relative to supply, which causes inflation. Second, acquiring domestic debt increases the interest rate in financial markets that crowds-out local private investments, thus negatively affecting Figure 2. Trend in inflation and economic growth in sub-Saharan African region from 2005 to 2022. 4 J.O. SUMBA ET AL. economic growth. Further, increasing government debt causes an intergenerational challenge in bearing the burden. This implies that reckless borrowing in the current period has a negative effect on the capital stock of future generations. This is emphasized by Ikiz (2020) who states that raising current government debt will force future governments to raise taxes to offset the debt obligations as proposed by Ricardian Equivalence Theory. The classical economists such as Adams Smith, on the hand argue that the government is naturally wasteful hence increased borrowing should always be viewed as a policy concern (Albu & Albu, 2021). The wastefulness of the state hinders capital formation, which in turn hinders economic growth while causing inflation especially when the borrowed funds are used in financing recurrent government expenditures, which surge aggregate demand (Sinaga et al., 2021). According to the classical theory of public, the government should be sensible like the household in operating a balanced budget while refraining from excessive borrowing. The classical economist argue that public borrowing should be reserved for investment in development projects or for financing war and should be repaid as soon as possible to avoid the accumulation of penalties and interests. Otherwise, public debt will be burdensome if used to finance other government outlier expenditures (Bofinger, 2022). Additionally, modern theory of public debt believes that internally held public debt element (domestic borrowing) is non-detrimental to the economy since it is owed to self. According to this theory, external debt is the only harmful, since it is paid to foreigners. This is so since the process of repaying principal and interest on debt, the transfer of real goods, as well as services is involved from the debtor to the creditor, leading to the loss of assets that could otherwise remain in the country to develop the economy (Barreyre & Delalande, 2020). Though Keynesian and classical theories of public debt agree that public debt of any kind can causes macroeconomic instability, the modern theory of public beliefs that only external/foreign debt hinders the stability of macroeconomic variables. This justifies disaggregating the public debt into domestic and foreign debt to determine the effect of each debt type on selected macroeconomic variables. Disaggregating the variables is also supported by Olaoye et al. (2022) who argue that what matters when analyzing public debt and its macroeconomic effect is the mode of public debt financing. This is because of the maturity period mismatch for domestic debt, and exchange rate vulnerability for the foreign debt. For instance, exchange fluctuation, experienced in most developing countries, puts the economy into a vulnerable situation when much of the public debt is foreign denominated due to disruption of capital flow as well as volatile GDP growth. The shift from foreign to domestic borrowing is also associated with the challenge of loan maturity mismatch, where short-term loans are invested in long-term development projects. This brings a challenge during debt repayment since the government will be forced to repay debts who investments are yet to start generating revenue. Another challenge associated with domestic debt is too much absorption financial resources by the government from local banks and other lending institutions. This causes financial instability and crowding out of private investment (Bashir Jama, 2021). 2.2. Empirical literature review 2.2.1. Public debt and inflation nexus Despite the available theoretical literature on the macroeconomic effect of public debt and a widely accepted thought that the mode of financing public debt matters for macroeconomic stability, the literature on this subject is still scarce. For instance, most of the available studies have concentrated on the effect of aggregate debt stock on macroeconomic stability. Similarly, less research has been done in developing countries, especially in SSA, regarding how the mode of public debt financing could affect macroeconomic stability. To start off on the empirical literature, Da Veiga et al. (2016) analyzed the relationship between public debt and inflation in African economies and revealed that public debt increases inflation. The study analyzed secondary panel data for 52 African states between 1950 and 2012 while considering three public debt levels as a percentage of GDP (30%, 30% to 60%, and 90% ). The positive relationship between these variables is further supported by Fasanya et al. (2021) who used the Autoregressive Distributed Lag (ARDL) model with structural breaks to test whether Nigeria’s fiscal deficit is inflationary. In this study, consumer price index was used as the dependent variable while money COGENT ECONOMICS & FINANCE 5 supply and fiscal deficit were the main explanatory variables. To add on, a study by Olaoye et al. (2022) among 25 sub-Saharan African countries using Driscoll–Kraay standard error and the dynamic panel threshold model also found that out increase in the foreign debt worsens inflation which is in support of the modern theory of inflation. The study by Olaoye argues that continuous accumulation of public debt more so the foreign debt exposes the country to exchange rate fluctuation, which causes inflation. Some studies have also shown that public debt does not cause inflation hence appropriate. For example Aimola and Odhiambo (2021a) study on the public debt and inflation nexus in Nigeria using Autoregressive distributed lag bounds model found that public debt does not cause inflation either in long or short run. 2.2.2. Public debt and economic growth nexus Empirical studies on the relationship between public debt and economic growth have also shown a wide range of results as follows; To start with Rana and Wahid (2017) study on the relationship between fiscal deficits and economic growth in Bangladesh, the relationship between public debt and economic growth is negative. This study employed the error correction model, ordinary least squares, and Granger causality tests as analytical models and found a negative relationship between fiscal deficit and economic growth between 1981 and 2011. This is also supported by Sandow et al. (2022) study on the external debt and economic growth in 31 SSA countries. In this study, the negative relationship between external debt and economic growth was found in only those countries that had low public sector management, otherwise the relationship was found to be positive. To add on Yusuf and Mohd (2021) study on the impact of public debt on economic growth in Nigeria also found out a negative relationship between domestic debt and economic growth in short run. In this study, Autoregressive distributed lag model was employed on the time series data set between 1980 and 2018. Some studies around this subject have also found positive relationship between public debt and economic growth. For example Kryeziu and Hoxha’s(2021) study on the fiscal deficit and its effect on economic growth for the Eurozone countries between 1995 and 2015 and found out that there exists a positive relationship between fiscal deficit and economic growth. This study used multiple regression least squares model for analysis. The positive relationship between public debt and economic growth is also confirmed by Aragaw (2021) on the study twin deficit and economic growth in selected African countries. This study used the panel threshold model in addition to the bootstrap panel granger causality test and found that public debt has a significant positive effect on economic growth when the debt- to-GDP ratio is low. To sum up, negative effect of public debt on macroeconomic stability which is widely accepted proposition is caused by the problem of debt overhung that results from excessive wasteful borrowing (Botta, 2020). The debt-overhung problem creates fear among investors that they would be overtaxed to repay debt, which makes them to shift their businesses to other countries with less debt obligations. It also increases debt servicing costs at the expense of investing in development projects, which would otherwise generate income and create employment (Onafowora & Owoye, 2019). 3. Methodology 3.1. Data description The data for this study was annual panel data sourced from the World Bank database (World Development Indicators) and the IMF (world economic outlook). Given that some data was not available on IMF and World Bank data bases, some data sites such as www.tradingeconomics.com as well as individual countries’central banks were also used for collecting data. Unbalanced panel data covering the period between 2005 and 2022 for 45 countries in SSA was collected. All variable data, except domestic borrowing, were obtained directly from the stated databases in their respective measurement units. The author calculated the data for domestic debt by dividing the total value of domestic debt by the total GDP in a given year, both expressed in constant local currency units (LCU). Although there are long panels for some countries, 2005–2022 was selected as the study period to ensure uniform coverage for all countries, since it is the period when data on most variables is available. 6 J.O. SUMBA ET AL. 3.2. Justification of two-step system GMM estimation model The two system-generalized method of moments (GMM) proposed by the Blundell and Bond (1998)and Arellano and Bover (1995) was used as the main estimation model in this study. The model was chosen since it is designed to suit the dynamic panel data analysis with short panels and many cross-sectional units. The GMM standard procedure basically differentiate the instruments and instrumental variables in which endogenous variables are put in the instrumental variables group as lags of these variables. Similarly, the exogenous regressors as well as other appropriate instruments are included in the model’sinstrumentalvariables (IV) procedure which corrects autocorrelation in panel data analysis (Van Bon, 2015). In particular, the two-step system GMM was selected for this analysis based on the following considerations. First, the model is usually appropriate when the number of cross-section units (N) is greater than the number of time series (T), which suits our data set with 45 cross-sections (countries), spanning over 17 years from 2005 to 2022. Second, the model has the ability to solve the problem of weak instruments as well as the downward/ upward bias problem which is associated with the difference GMM model and common in panel data analysis. Third, the system GMM model also corrects the problem of reverse causality and endogeneity bias caused by feedback relationship between variables, as well as omitted variable biases that are common in macroeconomic analysis. Moreover, the two-step system GMM model controls for the individual country-spe- cific effect (pi)aswellastimeeffectsðdtÞand is more efficient than the one-step system GMM model (Caporale et al., 2015). To test the validity of the estimated results, this study conducted two main GMM post-estimation tests which are Hansen test for instruments validity and the Arellano-Bond test for first and second order autocorrelation. The Hansen test provided the null hypothesis of over-identifying restrictions, implying that instruments used in the model are valid, hence uncorrelated with the error term, which should not be rejected. This means that the p-value of Hansen test should be as large as possible. The Arellano- Bond test for first and second order auto correlation were used to detect the autocorrelation problem. While the first order autocorrelation (AR1) could be ignored since it is expected to be significant, the second order autocorrelation is emphasized on seeking not to reject the null hypothesis at the 5% confidence level in order to show that the model does not suffer from autocorrelation problem. 3.3. Model specification and data This study analyses the link between public debt (domestic and foreign borrowing) and selected macroeconomic variables (inflation and GDP growth). In the model specification, the study used both theoretical and empirical literature to select the independent variables and classified them as the main independent variables and control variables. Two models were specified with GDP growth and inflation (INF) as the dependent variables. In the first equation, this study modeled GDP growth as a function of domestic borrowing (DB), foreign borrowing (FB), official development assistance (ODA), gross capital formation (CPF), real interest rate (RIR), exchange rate (EXR) and foreign direct investment (FDI). In the second model, foreign borrowing (FB), domestic borrowing (DB), real interest rate (RIR), exchange rate (EXR) official development assistance (ODA), gross capital formation (CPF) and money supply (M2) were independent variables to explain the inflation as the dependent variables. In the measurement of the study variables, foreign borrowing was measured as the total external debt obligations owed to non-residents of a country while the domestic debt was measured as the total financial obligations owed to local lenders including banks and non-bank financial institutions. Both variables were expressed as a percentage of GDP and they also served as main explanatory variables in both models. Other variables in the study such as real interest rate (RIR), exchange rate (EXR) and broad money supply (M2), were measured as annual percentage domestic interest rate in the economy, change in value of local currency against US dollar and annual percentage increase in money supply in the economy respectively. Official development assistance inflow (ODA), gross capital formation (CPF) and foreign direct investment (FDI) were expressed as percentages of GDP. These groups of variables served as control variables, supported by theories such as the fiscal theory of price level, Keynesian expenditure theory, and also empirical studies like Afonso and Ibraimo (2020), Ho et al. (2021), Agoba (2021), and Aimola and Odhiambo (2021b) who used them as indipendent variables. 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