• What Drives Liquidity Surpluses in Central and West African Financial Systems?

    Author(s):

     Shongwe W. Mbongeni


    mbongeni143413@gmail.com
    2025-06-08 22:19:37

    23 Downloads 54 Views

    Abstract

     The primary aim of this study is to explore the triggers of liquidity gluts in Central and West African countries, emphasizing the relationship between fiscal policy and various country specific factors. This research employs a quantitative approach, utilizing secondary data anal ysis and the Autoregressive Distributed Lag Model (ARDL) to analyse the data. The data is sourced from reputable institutions, including governmental bodies and international finance organizations, specifically targeting Central and West African countries. The findings indicate that while the banking sectors in Central and West Africa exhibit high liquidity levels, the challenge lies in effectively channelling this liquidity into credit markets and financial interme diation without triggering inflationary pressures. In Ghana, for instance, increased government expenditure has successfully stimulated borrowing and investment, thereby fostering economic growth and financial stability. Conversely, in Equatorial Guinea, the reliance on oil revenues complicates efforts to leverage liquidity for broader economic advancement, highlighting the influence of fiscal policy on liquidity dynamics. Factors such as credit extension, government spending, and exchange rate fluctuations significantly contribute to the liquidity challenges faced in the region. This study focuses specifically on Central and West African countries, and the findings may not be easily generalized to other regions or countries with different eco nomic characteristics or institutional frameworks. Policymakers are encouraged to implement proactive measures to address liquidity challenges promptly, preventing potential escalation into more significant economic issues. This includes developing monitoring systems to identify early signs of liquidity imbalances and fostering collaboration among financial institutions, government bodies, and regulatory agencies to enhance information sharing and coordinated responses. The implications of liquidity gluts extend beyond economic metrics, affecting social stability and welfare. High liquidity levels can lead to inflation, disproportionately impacting lower-income households by eroding purchasing power. If financial institutions fail to channel excess liquidity into productive investments, it may exacerbate unemployment and limit access to essential services.

    Keywords
    Budget deficit, lending interest rates, WAMZ, FGLS

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