Government Expenditure and Inflation Vis-À-Vis Trade Balance in Sub-Saharan Africa

Abstract

We investigate the interaction effect of government expenditure and inflation on the trade balance in Sub-Saharan Africa (SSA). We utilize balanced annual panel data for 20 SSA countries over the period 2005 to 2024 sourced from the World Development Indicators. We apply the Generalized Method of Moments (GMM) estimator to control for endogeneity, unobserved heterogeneity, and the dynamic nature of trade balance adjustment. Empirical results indicate a positive and statistically significant interaction between government expenditure and inflation. The estimated coefficient of the interaction term (GEX*INF) is 0.033026, implying that a simultaneous 10 percent increase in government expenditure and inflation improves trade balance by approximately 0.33 percent. This suggests that, in SSA, expansionary fiscal policy combined with moderate inflation can enhance trade balance performance, likely through increased domestic output, improved competitiveness, and reduced import dependence. We recommend coordinated fiscal-monetary policy frameworks that emphasize productive public spending and inflation control to strengthen external sector sustainability.