Macroeconomic determinants of balance of payments performance in selected African countries

Abstract Most African countries are open and are still opening up for international trade such that they are signatories to various trade agreements such as the Economic Partnership Agreement (EPA) with the EU, and Forum on China-Africa Cooperation (FOCAC), among others. However, these countries face a common persistent balance of payment deficit challenges, but the existing literature investigates this problem at specific country levels. Meanwhile, African countries are also rapidly transitioning towards economic integration with the establishment of the African Continental Free Trade Area (AFCFTA) to deepen intra-Africa trade. Therefore, for unionized policy proposition purposes, this study seeks to investigate the determinants of the balance of payments performance of African countries as a group based on panel data from 1990 to 2020 for 33 of these countries. For robustness checks, the system-GMM, the Random, and Fixed effects models are employed for estimating the determinants of BOP chosen based chiefly on the MABOP theory. The results show that domestic income, trade openness, and the broad money supply are the critical determinants of BOP performance in Africa. Further, the findings do not confirm the domestic income growth-BOP performance trade-off hypothesis, and an inverted U-shape rather than J-curve phenomenon is observed for Africa relative to the exchange rate. Based on the findings, the study recommends inter-alia that, African countries pursue value-creation-oriented investment, import substitution industrialization, as well as zero central bank budgetary financing policies to improve their BOP performances.