The dynamics of fiscal deficit and current account in 12 SADC countries

https://doi.org/10.35912/jgas.v5i1.2499
Published: Feb 10, 2025

Abstract:

Purpose: This study examines the relationship between fiscal deficits and current account deficits in SADC countries.

Methods: A panel analysis using a random-effects model with secondary data from 2009 to 2020 was employed.

Results: Higher fiscal deficits affected current account deficits in the SADC region. Real interest rates and trade openness are critical determinants of both deficits.

Contributions: This study enhances the understanding of macroeconomic imbalances in the SADC region, guiding policymakers in creating tailored policy frameworks for economic stability and sustainable development.

Novelty: The study provides a comprehensive analysis of the relationship between fiscal deficit and current account deficits in Southern African Development Community (SADC) 12-member countries, offering significant insights into the macroeconomic dynamics of the region. A panel analysis using a random effects model with data spanning September 2009 to December 2020 was employed, capturing trends and individual country effects. This study provides a robust examination of common trends and individual country effects, enriching the understanding of how these macroeconomic variables are important within the SADC context. Its emphasis on tailored policy frameworks to address fiscal and external imbalances reflects a forward-looking approach, offering practical guidance for policymakers striving to enhance economic stability and sustainable development within the SADC region. As an area for further study, the same research can be replicated in BRICKS countries and a comparative analysis can be conducted for a broader analysis.

Keywords:
1. SADC
2. Fiscal Balance
3. Current Account.
Authors:
1 . Talent Kondo
Bindura University of Science Education, Zimbabwe
2 . Simba Mutsvangwa
Bindura University of Science Education, Bindura, Zimbabwe
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Kondo, T., & Mutsvangwa, S. (2025). The dynamics of fiscal deficit and current account in 12 SADC countries. Journal of Governance and Accountability Studies, 5(1), 17–31. https://doi.org/10.35912/jgas.v5i1.2499
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Issue & Section
Vol. 5 No. 1 (2025): January
Articles
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References

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    Baharumshah, A. Z., Lau, E., & Khalid, A. M. (2006). Testing twin deficits hypothesis using VARs and variance decomposition. Journal of the Asia Pacific Economy, 11(3), 331-354.

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    Bitzis, G., Paleologos, J. M., & Papazoglou, C. (2008). The determinants of the Greek current account deficit: The EMU experience. Journal of International and Global Economic Studies, 1(1), 105-122.

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    Katrakilidis, C. P., & Trachanas, E. (2011). Has the accession of Greece in the EU influenced the dynamics of the country’s “twin deficits”? An empirical investigation.

    Kaufmann, S., Scharler, J., & Winckler, G. (2002). The Austrian current account deficit: Driven by twin deficits or by intertemporal expenditure allocation? Empirical Economics, 27, 529-542.

    Kim, C.-H., & Kim, D. (2006). Does Korea have twin deficits? Applied Economics Letters, 13(10), 675-680.

    Kosteletou, N. E. (2013). Financial integration, euro and the twin deficits of southern eurozone countries. Panoeconomicus, 60(2), 161-178.

    Laursen, S., & Metzler, L. A. (1950). Flexible exchange rates and the theory of employment. The Review of Economics and Statistics, 32(4), 281-299.

    Mankiw, N. G. (2000). The savers–spenders theory of fiscal policy. American economic review, 90(2), 120-125.

    Miller, S. M., & Russek, F. S. (1989). Are the twin deficits really related? Contemporary Economic Policy, 7(4), 91-115.

    Mohammadi, H. (2004). Budget deficits and the current account balance: New evidence from panel data. Journal of Economics and Finance, 28(1), 39-45.

    Mundell, R. A. (1960). The monetary dynamics of international adjustment under fixed and flexible exchange rates. The Quarterly Journal of Economics, 74(2), 227-257.

    Nasir, M. S., & Ahsan, M. Q. (2023). Coronavirus pandemic and its impacts on the world’s economy. Journal of Sustainable Tourism and Entrepreneurship, 4(2), 105-115.

    Neda, F., & Mohammad, P. (2011). The relationship between budget deficits and current account deficits. Journal of American Science, 7(10), 267-275.

    Nickel, C., & Vansteenkiste, I. (2008). Fiscal policies, the current account and Ricardian equivalence.

    Oladipo, S., Oseni, I., & Onakoya, A. (2012). Empirical Analysis of Twins’ Deficits in Nigeria. International Journal of Management and Business Studies, 38-41.

    Papadogonas, T., & Stournaras, Y. (2006). Twin deficits and financial integration in EU member-states. Journal of Policy Modeling, 28(5), 595-602.

    Ricardo, D. (1955). The works and correspondence of David Ricardo: Volume 10, Biographical miscellany (Vol. 10): Cambridge University Press.

    Ricciuti, R. (2003). Assessing ricardian equivalence. Journal of Economic Surveys, 17(1), 55-78.

    Rubin, R. E., Orszag, P. R., & Sinai, A. (2004). Sustained budget deficits: longer-run US economic performance and the risk of financial and fiscal disarray. Paper presented at the AEA-NAEFA Joint Session, Allied Social Science Associations Annual Meetings, The Andrew Brimmer Policy Forum,‘‘National Economic and Financial Policies for Growth and Stability.’’January.

    Schmitz, M. (2014). Financial remoteness and the net external position. Review of World Economics, 150, 191-219.

    Seater, J. J. (1993). Ricardian equivalence. Journal of economic literature, 31(1), 142-190.

    Shastri, S., Giri, A., & Mohapatra, G. (2017). An empirical investigation of the twin deficit hypothesis: Panel evidence from selected Asian economies. Journal of Economic Research, 22, 1-22.

    Smith, J. S. (2019). International trade promotion methods for SMEs in low and lower-middle-income economies. International Journal of Financial, Accounting, and Management, 1(3), 131-145.

    Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of econometrics, 66(1-2), 225-250.

    Trachanas, E., & Katrakilidis, C. (2013). The dynamic linkages of fiscal and current account deficits: New evidence from five highly indebted European countries accounting for regime shifts and asymmetries. Economic Modelling, 31, 502-510.

    Udah, E. (2010). Adjustment policies and current account behaviour: Empirical evidence from Nigeria. Global Journal of Social Sciences, 9(1), 45.

    Vamvoukas, G. A. (1999). The twin deficits phenomenon: evidence from Greece. Applied economics, 31(9), 1093-1100.

  1. Abiad, A., Leigh, D., & Mody, A. (2009). Financial integration, capital mobility, and income convergence. Economic Policy, 24(58), 241-305.
  2. Ahmad, M. M., & Dahalan, J. (2020). Not aid, but trade-an application of ARDL bound test for Pakistan economy. International Journal of Financial, Accounting, and Management, 2(1), 51-64.
  3. Ahmed, M. A., & Rozario, K. P. (2024). Impact of off-balance sheet activities on bank profitability: Evidence from Bangladesh. International Journal of Financial, Accounting, and Management, 6(2), 283-299.
  4. Akbostanci, E., & Tunç, G. ?. (2001). Turkish twin effects: An error correction model of trade balance. Retrieved from
  5. Algieri, B. (2013). An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries. Economic Systems, 37(2), 233-253.
  6. Baharumshah, A. Z., Lau, E., & Khalid, A. M. (2006). Testing twin deficits hypothesis using VARs and variance decomposition. Journal of the Asia Pacific Economy, 11(3), 331-354.
  7. Barro, R. J. (1979). On the determination of the public debt. Journal of political Economy, 87(5, Part 1), 940-971.
  8. Bitzis, G., Paleologos, J. M., & Papazoglou, C. (2008). The determinants of the Greek current account deficit: The EMU experience. Journal of International and Global Economic Studies, 1(1), 105-122.
  9. Blecker, R. A. (2016). Beyond the Twin Deficits: A Trade Strategy for the 1990's: A Trade Strategy for the 1990's: Routledge.
  10. Bluedorn, J., & Leigh, D. (2011). Revisiting the twin deficits hypothesis: the effect of fiscal consolidation on the current account. IMF Economic Review, 59(4), 582-602.
  11. Boyd, D., Caporale, G. M., & Smith, R. (2001). Real Exchange Rate Effects on the Balance of Trade: Cointegration and the Marshall-Lerner Condition. International Journal of Finance & Economics, 8(7), 187-200.
  12. Brooks, C. (2019). Introductory econometrics for finance: Cambridge university press.
  13. Calderon, C., Alberto, C., & Norman, L. (2002). Determination of current account deficits in developing countries. World Bank Policy Research Working Paper(2398).
  14. Cavallo, M. (2005). Understanding the twin deficits: new approaches, new results.
  15. Chen, R., Milesi-Ferretti, G. M., & Tressel, T. (2013). External imbalances in the eurozone. Economic Policy, 28(73), 101-142.
  16. Chika, O. V., Oshiogwemoh, D., & Promise, E. (2022). Impact of tax reforms on economic growth of Nigeria (2000-2021). Goodwood Akuntansi dan Auditing Reviu, 1(1), 79-95.
  17. Chinn, M. D., & Prasad, E. S. (2003). Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration. Journal of international economics, 59(1), 47-76.
  18. Corsetti, G., & Müller, G. J. (2006a). Budget deficits and current accounts: Openness and fiscal persistence. Economic Policy, 21(48), 597-638.
  19. Corsetti, G., & Müller, G. J. (2006b). Twin deficits: squaring theory, evidence and common sense. Economic Policy, 21(48), 598-638.
  20. Edwards, S. (2005). The end of large current account deficits, 1970-2002: Are there lessons for the United States? : National Bureau of Economic Research Cambridge, Mass., USA.
  21. Giorgin, G., & Holden, K. (2003). Does the Ricardian proposition hod in less developed countries. International Review of Applied Econometrics, 17(2).
  22. Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: Journal of the econometric society, 424-438.
  23. Gujarati, D. N. (2009). Basic econometrics: McGraw-Hill.
  24. Harberger, A. C. (1950). Currency depreciation, income, and the balance of trade. Journal of political Economy, 58(1), 47-60.
  25. Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society, 1251-1271.
  26. Hindi, N. M., & Sundaram, S. (2002). The Relation Between Off-Balance Sheet Activities and US Bank Profitability. Journal of Accounting and Finance Research, 10(3), 15.
  27. Iram, M., Shadid, A., Mahpara, S., & Fazli, R. (2011). Old wine in new bottles: testing the keynesian preposition of twin deficit in case of Pakistan. International Journal of Business and Social Science, 2(5), 209.
  28. Javid, A. Y., Javid, M., Arif, U., & Sabir, M. (2010). Fiscal Policy and Current Account Dynamics in the Case of Pakistan [with Comments]. The Pakistan Development Review, 577-592.
  29. Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration—with appucations to the demand for money. Oxford Bulletin of Economics and statistics, 52(2), 169-210.
  30. Kalou, S., & Paleologou, S.-M. (2012). The twin deficits hypothesis: Revisiting an EMU country. Journal of Policy Modeling, 34(2), 230-241.
  31. Katrakilidis, C. P., & Trachanas, E. (2011). Has the accession of Greece in the EU influenced the dynamics of the country’s “twin deficits”? An empirical investigation.
  32. Kaufmann, S., Scharler, J., & Winckler, G. (2002). The Austrian current account deficit: Driven by twin deficits or by intertemporal expenditure allocation? Empirical Economics, 27, 529-542.
  33. Kim, C.-H., & Kim, D. (2006). Does Korea have twin deficits? Applied Economics Letters, 13(10), 675-680.
  34. Kosteletou, N. E. (2013). Financial integration, euro and the twin deficits of southern eurozone countries. Panoeconomicus, 60(2), 161-178.
  35. Laursen, S., & Metzler, L. A. (1950). Flexible exchange rates and the theory of employment. The Review of Economics and Statistics, 32(4), 281-299.
  36. Mankiw, N. G. (2000). The savers–spenders theory of fiscal policy. American economic review, 90(2), 120-125.
  37. Miller, S. M., & Russek, F. S. (1989). Are the twin deficits really related? Contemporary Economic Policy, 7(4), 91-115.
  38. Mohammadi, H. (2004). Budget deficits and the current account balance: New evidence from panel data. Journal of Economics and Finance, 28(1), 39-45.
  39. Mundell, R. A. (1960). The monetary dynamics of international adjustment under fixed and flexible exchange rates. The Quarterly Journal of Economics, 74(2), 227-257.
  40. Nasir, M. S., & Ahsan, M. Q. (2023). Coronavirus pandemic and its impacts on the world’s economy. Journal of Sustainable Tourism and Entrepreneurship, 4(2), 105-115.
  41. Neda, F., & Mohammad, P. (2011). The relationship between budget deficits and current account deficits. Journal of American Science, 7(10), 267-275.
  42. Nickel, C., & Vansteenkiste, I. (2008). Fiscal policies, the current account and Ricardian equivalence.
  43. Oladipo, S., Oseni, I., & Onakoya, A. (2012). Empirical Analysis of Twins’ Deficits in Nigeria. International Journal of Management and Business Studies, 38-41.
  44. Papadogonas, T., & Stournaras, Y. (2006). Twin deficits and financial integration in EU member-states. Journal of Policy Modeling, 28(5), 595-602.
  45. Ricardo, D. (1955). The works and correspondence of David Ricardo: Volume 10, Biographical miscellany (Vol. 10): Cambridge University Press.
  46. Ricciuti, R. (2003). Assessing ricardian equivalence. Journal of Economic Surveys, 17(1), 55-78.
  47. Rubin, R. E., Orszag, P. R., & Sinai, A. (2004). Sustained budget deficits: longer-run US economic performance and the risk of financial and fiscal disarray. Paper presented at the AEA-NAEFA Joint Session, Allied Social Science Associations Annual Meetings, The Andrew Brimmer Policy Forum,‘‘National Economic and Financial Policies for Growth and Stability.’’January.
  48. Schmitz, M. (2014). Financial remoteness and the net external position. Review of World Economics, 150, 191-219.
  49. Seater, J. J. (1993). Ricardian equivalence. Journal of economic literature, 31(1), 142-190.
  50. Shastri, S., Giri, A., & Mohapatra, G. (2017). An empirical investigation of the twin deficit hypothesis: Panel evidence from selected Asian economies. Journal of Economic Research, 22, 1-22.
  51. Smith, J. S. (2019). International trade promotion methods for SMEs in low and lower-middle-income economies. International Journal of Financial, Accounting, and Management, 1(3), 131-145.
  52. Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of econometrics, 66(1-2), 225-250.
  53. Trachanas, E., & Katrakilidis, C. (2013). The dynamic linkages of fiscal and current account deficits: New evidence from five highly indebted European countries accounting for regime shifts and asymmetries. Economic Modelling, 31, 502-510.
  54. Udah, E. (2010). Adjustment policies and current account behaviour: Empirical evidence from Nigeria. Global Journal of Social Sciences, 9(1), 45.
  55. Vamvoukas, G. A. (1999). The twin deficits phenomenon: evidence from Greece. Applied economics, 31(9), 1093-1100.