Financial development and environmental quality: the role of economic growth among the regional economies of Sub-Saharan Africa

Abstract

<p>The Sub-Saharan African region is considered to be the most susceptible to the effects of climate change. The region's climate is influenced by several factors, the most notable of which is increased variation in development. The conglomerate between the financial sector and environmental quality (EQ) has been a priority for policymakers and analysts. This study looked at the complex relationships between financial development (FD) and environmental quality, as well as the position of economic growth (EG), from the perceptions of the five sub-national economies, from 1980 to 2017. The study tested the EKC hypothesis across the sub-regions. We employed the panel vector autoregressive (PVAR) model in a generalized method of moment framework to investigate the topic. The PVAR result showed that (i) financial development had a negative impact on CO₂ in four geographical regions (Western, Southern, Northern, and Central). As a result, FD in these countries minimizes carbon emissions and enhances the atmosphere. (ii) Also, FD had a positive impact on carbon emissions in Western Africa. As a result, FD in these countries increases CO₂ rather than improving environmental quality. The EKC hypothesis was validated in the Western African sub-region but was rejected in Central and Eastern (u-shape relationship) African sub-regional economies indicating variations in growth and environmental outcomes among the sub-regional economies. The Granger causality results in the West and Central African republics was a two-way causal connection between EG and CO₂ . The results demonstrate how "EG and CO₂ " and "CO₂ and EG" are intertwined in Western and Central, while most of the relationships were unidirectional. Detailed sub-regional policy recommendations are deliberated.</p>