DO TRANSFER STRUCTURES MATTER? INTERGOVERNMENTAL FISCAL TRANSFERS, FISCAL SUSTAINABILITY, AND EXPENDITURE COMPOSITION IN SELECTED AFRICAN COUNTRIES

Abstract

Abstract This study investigates the implications of intergovernmental fiscal transfers for sub-national fiscal sustainability and expenditure composition in four African countries: Nigeria, Kenya, Ethiopia, and South Africa. Using panel data covering the period 2010 to 2024, the analysis evaluates how the structure of transfers influences fiscal outcomes at the sub-national level. In particular, the study distinguishes between fragmented (conditional) transfers and non-fragmented (block or consolidated) transfers and assesses their effects on fiscal sustainability, measured by the debt-to-revenue ratio, as well as on expenditure allocation between capital and recurrent spending. Panel econometric techniques are employed, including fixed and random effects estimators selected through Hausman specification tests. The findings indicate that non-fragmented transfers are more closely associated with improved fiscal sustainability in several contexts, particularly in Nigeria and Kenya, where block transfers are linked to lower debt-to-revenue ratios. In contrast, fragmented transfers show no consistent statistical relationship with fiscal sustainability across the countries examined. The results further show that population size increases fiscal pressure on sub-national governments. With respect to expenditure composition, the impact of transfers varies across institutional settings. While transfers support both capital and recurrent expenditure in Ethiopia and South Africa, their influence on development-oriented spending remains limited in Nigeria and Kenya, where recurrent expenditure dominates. The study concludes that the developmental impact of fiscal decentralization depends largely on the structure of intergovernmental transfers and the institutional environment governing their use. JEL Classification Codes: H71 H72 H74 H77 O23.