Abstract

Sierra Leone, like many other developing countries, faces constant budget deficit (government expenditure exceeding government revenue) as well as current account deficit (imports outweighing exports) thereby creating a twin-deficit problem or twin deficits hypothesis. The objective of the study is to investigate and analyse the overlap between budget deficit and current account deficit in Sierra Leone for the period between 1990 and 2023 while considering the potential policy effects for achieving sustainable economic growth. The study employs time series secondary data obtained from the World Bank Database and the Ministry of Finance. Various macroeconomic variables including Real Exchange Rate and Real Gross Domestic Product were specified in the model adopted in this study. Before applying the Autoregressive Distribution Lag (ARDL) approach to investigate and assess the long-run and short-run relationships between the variables; and Granger Causality test technique to examine whether causal relationship exists between the variables under investigation, the study first tested the variables for stationarity via unit roots tests. To ascertain the robustness of the estimated equations using the required econometric procedure, diagnostic tests were variously carried out. Empirically, the study finds a long run relationship between budget deficit and current account deficit in Sierra Leone for the period under study. The study, therefore, concludes that there exists a bidirectional causality between budget deficit and current account deficit in the country. The study, therefore, proffers policy recommendations consistent with the findings, including strengthening domestic revenue mobilisation, improving public expenditure management, and diversifying the export base to reduce reliance on foreign aid and external borrowing.