December 10, 2025Open Access

An empirical investigation of current account balance and economic growth in Sierra Leone: evidence from GARCH-model and VEC-model

Key Points

Economic growth is significantly impeded by public debt and inefficient foreign direct investment allocation, highlighting the need for effective policies.
Foreign direct investment impacts growth, while terms of trade show a positive effect over time, according to the GARCH and VEC models.
Persistent current account balances and exchange rate volatility are crucial factors influencing economic growth in Sierra Leone.
Macro policies require enhancement to address issues related to public debt and financial stability for sustainable growth.

Abstract

This research examines the relationship between current account balances (CABs) and economic growth in Sierra Leone from 1980 to 2024, utilizing GARCH and VECM time series models. The outcomes reveal that persistent CABs, exchange rate volatility (EXVOL), inefficient allocation of foreign direct investment (FDI) and a rising public debt (PD) burden significantly impede lasting growth. Gross capital formation (GCF) hinders growth, suggesting a weak financial sector and an ineffective monetary policy stance. Advancements in terms of trade (ToT) are the only indicators with a lasting, positive impact on growth. In the transitory period, the economy corrects deviations from long-term equilibrium at a modest 9.12% rate, with capital formation solely showing a significant positive effect. These results suggest the need for sound macroeconomic policies to enhance stability and growth.

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