COVID-19 AND BALANCE OF PAYMENTS IN SUB-SAHARAN AFRICA: DOES THE ROLE OF INSTITUTION QUALITY MATTER?

Abstract

The COVID-19 pandemic caused a worldwide economic disturbance. It interfered with supply channels and had long-standing and diverse impacts on the international Balance of Payments (BOP). However, the pandemic also enhanced the digital financial inclusion and had other positive effects. This, therefore, poses a question on the direction and extent to which the overall BOP was impacted. At the same time, country institutions were at the helm of trying to contain the pandemic in various ways. This thus poses a question regarding the effect of COVID-19 vis-a-vis institutions in an economy. This paper focuses on analyzing the effect of COVID-19 on BOP in SSA countries, with reference to the institutional quality and income level disparities across countries. We used secondary data from the period 2018 to 2021. In terms of analysis, we employed a random effects model, to examine their impact on BOP accounts, including current, capital, and financial accounts. Findings show a positive general effect of COVID-19 on the BOP, with both Current and Financial accounts having positive net effects. Governance scores also had a positive and significant relationship with Capital account, supporting the view that improved institutional quality may increase capital inflows during crises. However, results of the effect of COVID-19 on overall BOP with regards to the governance scores, show statistical insignificance, which underscores the contextuality of pandemic-driven economic disruptions. Furthermore, in terms of income classification, the pandemic had negligible influence on the BOP of low-income nations while positively impacting their real interest and inflation rates. Middle-income countries experienced positive effects from the pandemic, with negative impacts only coming from the GDP per capita change and the scores in governance. Based on these results, we conclude that it is imperative that policy measures should always be crafted considering the strength of the institutions, and the level of income to help foster more resilience in SSA economies in the face of future health shocks.