Inclusive growth in Sub-saharan Africa: the role of fiscal sustainability and sovereign bond market perception

The study thoughtfully explores the important roles of fiscal sustainability, as indicated by the cyclically adjusted fiscal balance, and market perception in the sovereign bond market, particularly in relation to their contributions to inclusive growth in sub-Saharan Africa (SSA). This examination is especially pertinent, given the limited existing literature addressing these empirical connections, amidst unsatisfactory performance on inclusiveness of growth and development outcomes. Utilising the instrumental variable-generalised method of moments (IV-GMM) and Principal Component Analysis (PCA), the research developed an index of inclusive growth, which spans the period from 2007 to 2023 and encompasses a panel of 34 economies. At the baseline, both fiscal sustainability and market perception positively influence inclusive growth. However, their interaction dampens inclusive growth. The net interactive marginal effect shows that within a high-risk sovereign bond market perception, fiscal sustainability marginally improves inclusive growth and within a moderate risk perception, inclusive growth is dampened. SSA must pursue a balanced approach to fiscal consolidation—one that preserves investments in inclusivity while concurrently enhancing debt credibility. Fiscal consolidation yields diminishing marginal returns for inclusive growth, with a diminishing impact from the minimum to the mean levels.