Fiscal Sustainability in Sub-Saharan Africa: The Effects of Climate Change, Institutional Quality, Foreign Exchange Rate and Foreign Direct Investment

Rahab Wanjiku Kinuthia, Peter Omboto and Hilary Ndambiri
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Rahab Wanjiku Kinuthia: Department of Economics School of Business and Economics, Moi University, Kenya
Peter Omboto: Department of Economics School of Business and Economics, Moi University, Kenya
Hilary Ndambiri: Department of Economics School of Business and Economics, Moi University, Kenya

International Journal of Research and Innovation in Social Science, 2025, vol. 9, issue 6, 1825-1842

Abstract: Purpose This paper empirically analyses the effect of climate change, institutional quality, foreign exchange rate and foreign direct investment on fiscal sustainability in Sub-Saharan Africa (SSA). Design/methodology/approach The study is based on 989 country-year observations from 43 SSA countries spanning 2000 to 2023. A fixed effects model was employed to analyze the panel data, while the Generalized Method of Moments (GMM) was used to validate the regression results and address potential endogeneity. Research findings The findings challenge conventional expectations. Climate change shows a statistically significant positive effect on fiscal sustainability, suggesting that with effective adaptation and mitigation strategies, it can generate fiscal benefits. Institutional quality has a significant negative relationship, highlighting how weak institutions erode fiscal performance through corruption and inefficiency. A stable foreign exchange rate positively influences fiscal sustainability by reducing external debt risks. Conversely, FDI shows a negative impact, suggesting that in the presence of weak regulatory frameworks, it may contribute to revenue losses via tax avoidance and capital outflows. Practical implications The results offer important insights for policymakers, investors, and regulators. Policymakers in SSA should prioritize climate adaptation and mitigation investments—such as resilient infrastructure, sustainable agriculture, and renewable energy—to reduce long-term disaster costs and stabilize fiscal performance. Institutional reforms and stronger public financial management systems are also essential for improving fiscal outcomes and attracting quality investment. Additionally, SSA governments should re-evaluate tax incentives, promote investment in non-extractive sectors, and strengthen domestic economic linkages. Originality/value This study contributes to the growing literature on fiscal sustainability by offering empirical evidence on the roles of climate change, institutional quality, exchange rates, and FDI in a developing region context, where these interrelations remain underexplored

Date: 2025
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