ASSESSING THE ROLE OF FINANCIAL INCLUSION ON DEBT SUSTAINABILITY: EVIDENCE FROM SUB-SAHARAN AFRICA

Abstract

This study examines the impact of financial inclusion on debt sustainability in 37 Sub-Saharan African countries. Using panel data between 2004 and 2022, the study utilized the two-step system Generalized Method of Moments (GMM) estimator to explore how financial inclusion indicators - bank branch penetration, ATM penetration and domestic private credit - affect the primary balance ratio and its interplay with the Debt-to-GDP ratio.  The findings from the study show that higher levels of ATM and bank branch penetration significantly enhance fiscal balances by promoting growth-enhancing activities that generate more tax to government. The findings generally reveal that financial inclusion ihave a significant positive impact on primary balance ratio, suggesting that access to financial services by households and firms promotes debt sustainability among SSA countries. Similarly, the interactive term for financial inclusion and debt sustainability included in the model indicates that financial inclusion reduces the consequential effect of high debt on fiscal space of SSA countries. These findings stress the need for expanding financial services in the region to promote debt sustainability.