O55 - Economywide Country Studies: AfricaReturn

While prior research emphasizes the socio-economic benefits of financial inclusion, its implications for bank profitability remain underexplored. This paper employs seven traditional and four digital indicators to create a financial inclusion index through principal component analysis (PCA). To capture potential nonlinearities, quadratic specifications are incorporated within a two-step system generalized method of moments (GMM) framework and validated using the Lind and Mehlum (2010) U-shape test, while Granger causality tests examine directional effects over the 2015-2023 period. Results indicate that traditional financial inclusion positively influences profitability, although the hypothesized inverted U-shaped effect is economically plausible but not statistically confirmed. Digital financial inclusion initially reduces profitability, but its squared term reveals a statistically significant U-shaped effect, indicating gains after reaching a critical threshold. Granger causality test indicates a bi-directional relationship for traditional inclusion and a uni-directional for digital inclusion. The results emphasize the need for banks to integrate cost-effective digital tools alongside traditional services. Policymakers recommended adopting supportive regulatory frameworks, enhancing financial literacy, and ensuring consumer protection to foster digital transformation without undermining profitability. An integrated and phased approach aligning financial inclusion with profitability strategies is essential for promoting a resilient and inclusive banking sector.

There is no consensus on the key drivers of financial inclusion due to variation in the socioeconomic features of countries, use of indicators and research methods. The main objective of this study is, therefore, to empirically examine the key drivers of financial inclusion across 26 selected Sub-Saharan African (SSA) economies for the period between 2000 and 2019, using a system generalized method of moments (GMM). A principal component analysis (PCA) is applied to construct a composite index of financial inclusion to address the multi-dimensional nature of the variable. The findings of the study indicate that both the macroeconomic and microeconomic factors influence the level of financial inclusion of the SSA countries. Specifically, the lag effect, economic growth, financial stability, inflation, financial deepening, liquidity, profitability, and bank efficiency are important drivers of financial inclusion in the SSA region. It is therefore important for policy makers and regulators to consider these factors while developing policies and strategies that foster access to financial products and services and ensure financial inclusion in the region.

Motivated by the persistent fall in oil prices due to incessant uncertainty-inducing events in recent years, this study empirically examined if economic growth in Africa's top five oil exporters (Algeria, Angola, Egypt, Libya, and Nigeria) is responding asymmetrically to changes in global economic uncertainty as well as uncertainties from U.S., Europe and China using nonlinear ARDL framework from 1997Q1 to 2021Q4. We find that rising global uncertainty hampers economic growth in these economies, while declining global uncertainty significantly enhances growth in Nigeria, Angola and Libya in the short run, but becomes growth-retarding in the long run. Thus, economic growth responds asymmetrically to global uncertainty, especially in the short run. The findings are robust to U.S., Europe, and China uncertainties, except that economic growth in Libya and Algeria remained unresponsive to U.S. and China uncertainties respectively. We concluded that Africa's oil exporters should embrace policies that can strengthen their resilience to global economic uncertainty as well as uncertainties from U.S., Europe, and China.

Africa is endowed with both natural resources and a young growing workforce. In light of this, it is obvious that regulations on labour markets will have significant impacts on economic growth, especially through effects on employment and productivity. This study provides information on labour market regulations (labour market flexibility) and their impacts on economic growth in Africa. In particular, this study examines the impact of labour market flexibility (regulations) on economic growth (real GDP per capita growth) relying on the Driscoll-Kraay fixed-effects estimator and the two-step system generalized method of moments (GMM) estimation techniques using data from 2000 to 2019 for 37 African countries. The results show a positive correlation, indicating that liberalizing rigid labour market regulations can lead to economic growth benefits. Specifically, it is observed that economic growth increases by approximately 0.16% resulting from a unit (one standard deviation) increase in labour market flexibility. The study also finds that economic growth (real GDP per capita growth) is high in countries that have flexible hour regulations, flexible mandatory costs of worker dismissal, and the absence of (or not strictly enforced) military conscription. These findings have important implications for African governments and policymakers as they may find it useful to liberalize the prevailing rigid labour market regulations to reap economic growth benefits.

This paper examines the effectiveness of remittances and official development assistance (ODA) in developing countries. It compares the outcomes of aid poured into the economies of the Third World for decades without any visible effect and remittances transferred by emigrants to their countries of origin which proved to be quite effective. We find that remittances have a stronger net positive effect on the increase of GDP per capita in developing economies than development aid. In addition, remittances tend to be higher than ODA funds, they are absorbed by 80-90 per cent (in comparison with 50 per cent of aid budgets spent on administrative and other costs) and do not hinge on institutional quality. The paper advocates the importance of remittances over ODA and supports the wide usage of coherent development policies executed by the developed Western economies with an aim to enhance transparent and efficient remittance transfers as one of the best methods to promote development in less-developed countries (e.g. economies in Africa, Asia or Latin America).