Financial Development, Government Expenditure and Economic Growth in Sub-Saharan Africa: Does the Composition of Public Spending Matter?

This study examines whether government expenditure moderates the relationship between financial development and economic growth in Sub-Saharan Africa (SSA). Financial development was measured by broad money, domestic credit to the private sector and interest rate spread; government expenditure by general government final consumption expenditure and gross capital formation. Six hierarchical interaction models were estimated by panel least squares on an unbalanced panel of 45 SSA countries over 2002–2021. Gross capital formation significantly strengthened the growth effects of both broad money and private sector credit. Government consumption expenditure offset the negative growth effect of broad money but weakened the positive contribution of private sector credit, consistent with crowding out. Neither measure moderated the interest rate spread–growth relationship. Public investment is therefore a complement to financial development, whereas recurrent spending can substitute for it. SSA governments should rebalance budgets toward capital formation and protect private credit markets.