Assessing the Nexus between Environmental Degradation, Agro-Climate Financing, and Economic Growth in Sub-Saharan Africa

Abstract

This study assesses the connection between environmental degradation, agro-climate financing, and economic growth in Sub-Saharan Africa (SSA) using yearly time series data from 2000 to 2022. The system generalized method of moments (GMM) was employed to tackle endogeneity issues, with robustness checks performed using DOLS and FMOLS to address cross-sectional dependence through robust standard errors. This method revealed important insights into the dynamics of economic growth. The findings show a significant positive connection between the economy’s past success and its current growth. CO2 emissions negatively impact economic growth, demonstrating the detrimental effects of environmental degradation. Agricultural finance has a positive influence on economic growth by boosting productivity and fostering economic growth. However, climate financing has a short-term negative impact on growth owing to high initial costs and inefficiencies, but it promotes long-term growth when combined with agricultural finance. The interaction between CO2 emissions and agricultural finance shows that increasing emissions reduces the benefits of agricultural investments, underscoring the vulnerability of agriculture-dependent economies. Conversely, the interaction of agricultural finance with climate finance enhances economic growth, demonstrating the relevance of combining climate and agricultural investments. Additionally, the study finds that exchange rate stability positively affects growth, while inflation has a negative impact. Robustness checks validate these findings and underscore the need for varied analytical methods to capture economic interactions comprehensively. The study recommends comprehensive policy measures to tackle environmental, agricultural, and climate challenges, promote sustainable growth, and leverage integrated financial solutions for long-term development in Sub-Saharan Africa.