PUBLIC INVESTMENT AND BALANCE OF PAYMENT EQUILIBRIUM IN WEST AFRICA: A PANEL GMM MODELLING

Abstract

This study examines the impact of disaggregated public investment on balance of payments equilibrium in West Africa, with particular emphasis on public investment in electricity infrastructure, road infrastructure, health facilities, and education. The motivation for the study arises from the persistent balance of payments deficits observed in many West African economies, alongside increasing government expenditure on infrastructure and human capital development. The study adopts a quantitative research design, utilizing panel data for selected West African countries with a particular focus on the member states of the Economic Community of West African States which are Benin, Burkina Faso, Cabo Verde, Cote d’Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo over the period 2010 to 2025. Data were sourced primarily from the World Bank’s World Development Indicators. The analysis employs the System Generalized Method of Moments (GMM) estimation technique using E-View10 software package in order to address issues of endogeneity, dynamic persistence, and unobserved heterogeneity. The findings reveal that public investment exerts varying effects on balance of payments equilibrium depending on the sector. Specifically, public investment in road infrastructure has a negative and statistically significant effect, indicating that it worsens the balance of payments in the short run, likely due to its import-intensive nature. In contrast, public investment in electricity infrastructure, health facilities, and education all exhibit positive but statistically insignificant effects, suggesting that their contributions to the external sector may be indirect or long-term. The lagged balance of payments variable is also positive but statistically insignificant, indicating weak persistence in external sector performance. Based on these findings, the study concludes that the effectiveness of public investment in improving balance of payments equilibrium depends largely on the sectoral composition of investment rather than its aggregate level. It is therefore recommended that policymakers prioritize investments that enhance domestic productive capacity and reduce import dependence. In addition, governments should promote local content in infrastructure development, strengthen complementary industrial and export-oriented policies, and improve the efficiency of public investment in health and education to ensure long-term external sector gains.