NEXUS BETWEEN REMITTANCE AND ECONOMIC GROWTH IN SUB-SAHARAN AFRICA: THE ROLE OF MEDIATING AND MODERATING FACTORS

Abstract

This study examines the effects of remittances on economic Growth across 34 countries in sub Saharan Africa over the period from 2000 to 2022. Utilizing a panel data approach, this analysis investigates the direct effects of remittances on Economic growth with moderating roles of exchange rate and institutional quality by using fixed effect model alongside with Pooled OLS. Additionally, it explores the indirect effect of remittance through mediating effects of consumption and investment (gross capital formation) by applying SEM. The results reveal that remittances exert a significantly detrimental direct effect on GDP per capita within the sub-Saharan African context. Moreover, the findings demonstrate that remittances have a substantial negative indirect effect on GDP per capita, primarily mediated through consumption and investment; thus, the influence of remittances on economic growth is partially transformed through these channels. These findings suggest that the inflow of remittances generates contractionary pressures on the economic growth. The research further clarifies the moderating role of exchange rate within the remittances-growth nexus. The results indicate that an increase in the exchange rate mitigates the negative direct and indirect impacts of remittances, as individuals are more inclined to remit when the exchange rate is elevated. Conversely, the moderating effect of institutional quality was found to be adverse, indicating that as institutional quality improves, remittances become less essential. Based on the finding the research recommend to enhance institutional quality and reduce remittance. These findings highlight the importance of considering both direct and indirect transmission mechanisms, as well as the role of contextual factors such as exchange rate and institutional quality, in assessing the comprehensive impact of remittances on economic Growth.