Does financial sector transparencies tame government debts in Africa: exploring for complementarities and nonlinear threshold effects

Blessing Akrumah, Edward Daniels and Baah Aye Kusi

Cogent Economics & Finance, 2024, vol. 12, issue 1, 2345303

Abstract: Despite evidence that improving financial sector transparency (FST) can help tame clientele (households, businesses and corporate) debts, the empirical literature fails to explore how improving FST can lower/tame the unsustainable soaring government or (regulator) debts, particularly in Africa where alternative government debt management is inevitable. Hence, this study examines the complementarity and nonlinear threshold effects of private and public sector-led financial transparencies on government debts in Africa for the first time. Using a dynamic GMM panel data strategy covering periods between 2004 and 2020, the results show that the joint term of public and private sector-led financial sector transparency has complementary-synergetic effects on long-term debts and interest on debts while having substitutive effects on gross and short-term government debts, implying that private and public sector-led financial transparencies are substitutes to each other or can be used to complement gross and short-term government debts but complementary on long-term debt and interest on debts. Similarly, it is reported that there is a nonlinear inverted U-shaped threshold effect of financial sector transparencies on government debts, implying that financial sector transparencies must reach a minimum threshold/level to induce the desirable reducing effect of financial sector transparencies on government debts in Africa. These results create awareness of how financial regulators can employ FST as a debt-reducing tool and require policymakers to expand and deepen FST information to hasten it and reinforce the reducing effect of financial sector transparencies on government debts.This study provides novel evidence on how transparency in the financial market can serve a tool for taming governments debts when is it well-developed to certain levels/thresholds. Especially in the context of Africa where governments debts have reached unsustainable thresholds and both country and international level financial bodies are seeking to have alternative mechanisms for lowering government debts, this study employs data on 23 African countries between the periods of 2004 and 2020 to show that (i) while the two forms of financial sector transparencies have substitutive effect on government debt, it could have either complementary or substitutive effect depending on the type of government debt (short-term, long-term, privately and publicly guaranteed debts), (ii) the reducing effect of financial sector transparency can only be attained when financial sector transparency is well-developed over a certain threshold. Hence, the impact of this study is its novel revelation that regulators can rely on improved financial sector transparency to lower government debts, particularly in Africa.

Date: 2024
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DOI: 10.1080/23322039.2024.2345303

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