Determinants of Fiscal Deficit in Conflict-affected States in Africa

This study examines the determinants of fiscal deficit with a special focus on conflict-affected states, using data from 37 countries in Africa from 1980 to 2013. The study demonstrates that government changes during periods of conflict are related to steep rises in the fiscal deficit. Conflicts that do, or potentially, result in a change in government generate a heightened risk of the government falling, and thus shorten the horizon of the incumbent, who, as a consequence, increases spending on the military to maintain their hold of power. This has the potential to increase the fiscal deficit. The results from empirical analyses show that political instability, measured by the number of internal conflict months, has direct influence on the fiscal deficit. This is found to be especially true for North Africa. The study, therefore, concludes that prolonged instances of conflict significantly increase the fiscal deficit. The study notes that many of the countries under investigation are highly natural resource dependent and this predisposes them to conflict. The decline in economic productivity resulting from the conflict situation and the consequent decline in the tax potential of the economy, at a time when military and relief spending has increased and expenditures on economic and social services need to be maintained, results in a decline of the fiscal balance. Moreover, the volatility of the prices of natural resources brings about fluctuations in the national income. Where government desires to smooth taxes over time, the tendency towards fiscal deficit is increased. Other empirical results indicate that a higher economic growth rate in the preceding year induces government to increase spending in the current year, leading to a higher fiscal deficit, and a decline in the balance of trade in the preceding year also increases the fiscal deficit in the current year.