Fragile States Working Papers (English)

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Assessing the Systemic Importance of Banks in Rwanda using Portfolio Similarity and Clustering Methods
(African Economic Research Consortium, 2021-11-18) Ntirushwamaboko, Dominique; Mugenzi, Patrick; Nyalihama, Christian
This paper assesses the similarity among Rwandan banks, especially looking at how the assets side and lending portfolios have been evolving, and their implications on systemic risks in the Rwandan banking system. The aim was to gauge a systemic risk that might originate from a cluster(s) of small banks, which is not well captured by traditional means of using the size or interconnectedness in network analysis. We used a variety of empirical approaches to tackle this aspect in the context of Rwanda, with data from 2016 to 2019. Our key findings suggest that the general measure of the portfolio similarity between individual banks is quite stable over time and driven predominantly by big banks. Conversely, we noted that some medium-sized banks have been consistently similar in terms of the loan portfolio and associated risks in the last four years, and therefore they can be exposed to common risks with impactful consequences, as the cluster is more sizeable than banks have taken individually
Corporate Earnings Retention Practices in Africa: Does Being Foreign Really Matter?
(African Economic Research Consortium, 2021-11-18) Ezeoha, Abel E.; Okeke, Obiajulu C.
This paper examines the earnings retention practices of incorporated firms in Africa. It hypothesizes that foreign and local firms operating in Africa have similar retention policies, and by extension similar tendency for capital exports. It makes use of robust descriptive and empirical methodology involving 444 (and 293 for the empirical analysis) listed firms, in 13 exchanges over the period 2005‒2018. The results show that corporate earnings retention is context sensitive; and that being foreign is indeed a deciding factor. The empirical evidence, based on the application of system dynamic GMM estimation procedure, further reveals that: firms with majority foreign interests are less likely to pursue aggressive earnings retention policies; earnings retention declines with increase in foreign interests; for foreign firms mostly, increase in the burden of effective tax payment significantly undermines earnings retention capacities of firms; and for local firms largely, increased investments in fixed assets provides a viable policy option for improving access to the external markets for corporate finance. The results also show that growth-oriented foreign and local firms are more likely to employ aggressive earnings retention policies to minimize their exposure to external capital markets. The paper concludes that, indeed being foreign matters in the earnings retention and internal capital markets debate in Africa, although firm-specific characteristics simultaneously play significant role in moderating the incentive of foreign companies (particularly the MNCs) to retain rather than repatriate profits. Evidence from this study therefore calls for the need for policy and capital control emphases to be shifted to deal with how firms (foreign and local) manage their internal capital market operations. The interactive impact also suggests that tax payment remains a functional mechanism for moderating the negative impact of tax on corporate earnings retention behaviour.
Determinants of Dividend Policy of Manufacturing Firms in Nigeria
(African Economic Research Consortium, 2021-11-18) Adelegan, O. Janet; Adeyemo, Kabiru; Adejuwon, Joshua; Taiwo, Adewale
The study set out to identify the determinants of dividend policy of firms in Nigeria from 1984 to 2020. Using the modified Lintner model as the theoretical framework, we analyze data on listed Nigerian manufacturing firms for 1,101 firm-years from 1984 to 2020. Data on dividend, profit after tax, total distributable earnings, leverage, turnover growth, firm size and market to book value were obtained from annual reports of firms. Results of sectoral analysis show that manufacturing firms’ dividend policies depend on profit after tax, preceding year dividend, size and growth of firms. The results also show that the manufacturing firms’ dividend payout depends more on profit after tax and past dividend and in general the objectives of the firm. However, there is enough evidence to conclude that profit after tax and past dividend are key determinants of firm dividend payment in Nigeria. There is need for firms to improve on their performance and increase their profitability level to have enough to transfer to revenue reserves for future dividend payments, especially when there is recession in the economy, as dividend payment is a key factor in growing investors’ confidence, and in enhancing the market values of firms.
Economic Costs of Civil Conflicts: The Case of Burundi
(2022) Ndoricimpa, Arcade; Ndayikeza, Michel-Armel
This study examines the effects of episodes of civil conflicts in Burundi on its economic performance. The study applies the regression method using Extreme Bound Analysis, and the Synthetic Control method. Our main results indicate that: (i) from 1970 to 2015, civil conflicts, on average, reduced economic growth by 4 percentage points per year of conflict; (ii) the 1993-2003 civil war cost each Burundian between US$ 1,290 and US$ 1,520 and between US$ 8 billion and US$ 10 billion to the whole country; (iii) the last civil conflict in 2015 has been relatively costly, having reduced economic growth by 8.9 percentage points relative to its counterfactual. These results highlight the need to consolidate peace to eliminate fragility and achieve long-term economic development.
An Empirical Analysis of Low-Leverage Behaviour: Evidence from Nigerian Quoted Firms
(African Economic Research Consortium, 2021-11-18) Paseda, Oluseun
Debt conservatism is one of the enduring puzzles in capital structure research. The reluctance of profitable firms to commit to high debt ratios to exploit tax benefits of debt has profound consequences for capital structure dynamics. Inspired by studies examining the persistence of conservative debt usage by firms, this paper examines the low-leverage behaviour within the Nigerian context, where it is a largely unexplored area. Using a sample of 50 non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2019, the study documents the following findings. The mean (median) market debt ratio for the entire sample period was 27.5% (19.5%), corresponding to the 60th (50th) percentile. Firm-years with market leverage ratios ranging from 40% and downwards to zero percent met the criteria for inclusion in the observation of low leverage phenomenon (LLP). The mean (median) market debt ratio for the defined low-leverage sub-sample was 12.7% (9.6%). Conservative capital structure is evident across the 17 industries embodied in the sample, and debt conservatism is a declining function of rating, market timing, financing deficit, asset riskiness and firm size. Conservative behaviour increases with marginal tax rate, non debt tax shields, growth, profitability, liquidity, uniqueness, age, relationship-specific investments and employee bargaining power. Both managerial conservatism and tax exhaustion appear to explain the LLP, with the former exerting greater impact.
Identifying Binding Constraints on Growth in the Context of Fragility: The Case of South Sudan
(African Economic Research Consortium, 2022-01) Deng, Lual A.; Hussien, Abdurohman Ali; Mayai, Augustino Ting
The central premise of this study is that violent conflict is the primary binding constraint to economic growth, and an obstacle to transition from fragility to stability in South Sudan. The study looks at the determinants of growth, and then applies the Growth Diagnostics Framework (GDF) to support the central premise of this study. Two key hypotheses underpin the central premise of this research: (1) Violent conflict has constrained investment in South Sudan during the period 2012-2016; and (2) Violent conflict continues to weaken institutions and capacities of the State to provide safety and economic opportunities for sustainable livelihoods in South Sudan.
Identifying Binding Constraints on Growth in the Context of Fragility: The Case of South Sudan
(2022-01) Lual A., Deng; Hussien, Abdurohman Ali; Mayai, Augustino Ting
The central premise of this study is that violent conflict is the primary binding constraint to economic growth, and an obstacle to transition from fragility to stability in South Sudan. The study looks at the determinants of growth, and then applies the Growth Diagnostics Framework (GDF) to support the central premise of this study. Two key hypotheses underpin the central premise of this research: (1) Violent conflict has constrained investment in South Sudan during the period 2012-2016; and (2) Violent conflict continues to weaken institutions and capacities of the State to provide safety and economic opportunities for sustainable livelihoods in South Sudan
The Impact of Conflict on State Capacity in Nigeria
(African Economic Research Consortium, 2022-01) Babajide, Adedoyin; Ajayi, Victor
Nigeria has witnessed incessant incidents of conflict-related violence in recent years. This paper seeks to investigate how conflicts affect state capacity in term of growth in GDP per capita and tax per GDP ratio, and to examine the potential spill over effect of conflict in neighbouring state. The System Generalised Method of Moments (GMM) technique is employed for a panel data of 37 states in Nigeria over the period 2000 to 2013. Our main results show that increase in incident of conflict reduces state capacity, with more negative effect on growth than tax. We also find evidence that states suffer weaker growth and loss of tax revenue because of conflict in adjacent states due to spill over effect of conflict. The difference-in-differences method is used to unravel the net effect of conflict in the Boko Haram afflicted states relative to other states. The findings suggest that individuals living in states heavily affected by Boko Haram experienced a negative change in state capacity, especially in their perception of government provision of health and education, relative to unaffected states between 2008 and 2012.
Impact of Investment Efficiency, Investment Scale and Financial Flexibility on Risk-Taking Behaviour in an Emerging Market
(African Economic Research Consortium, 2021-11-18) Duho, King Carl Tornam
There is limited number of studies that explore the concepts of investment efficiency, financial flexibility, and investment scale globally. Moreover, in the African context, these areas continue to be grey areas with limited knowledge on the effect they have on the risk-taking behaviour of listed non-financial firms. Using a data set of 264 firms across 17 countries in Africa over the period 2007‒2018, this study explores the effect of investment efficiency and financial flexibility, as well as the effect of investment scale and financial flexibility on the risk-taking behaviour of firms. The analysis was conducted using the two-step system generalized method of moments (System-GMM), with the robust option. With the z-score as a measure for risk-taking behaviour, the results show that investment efficiency is paramount for enhancing financial stability, but investment scale reduces the financial stability of firms. This nexus is moderated by firm size, and the effect of firm size on financial stability is found to be inverted U-shaped. The finding also shows the decreasing relevance of tangible assets against the growing relevance of intangible assets as the drivers of firm stability. The impact of other factors such as financial leverage, cash flow growth, revenue growth, GDP growth, and inflation are discussed in detail. The results have relevant implications for policy, practice, and future research.
Service Delivery in Fragile States: The Case of Health Sector in Zimbabwe
(2022) Atieno, Rosemary; Moyo, Theresa; Nyang'oro, Owen
This study examines the effect of fragility on health service delivery in Zimbabwe, during a period when the country displayed characteristics that mirror the definitions of a fragile state. Using the Zimbabwe Demographic and Health Survey (DHS) 2015 complemented with data from Afrobarometer survey round 6 of 2014 Measures of fragility are found not to be statistically significant, whether measured by trust in institutions or economic conditions, but have the expected sign. We observe that this result could mainly be attributed to the fact that while macroeconomic and political instability negatively affected government’s contribution to the health sector, it did not affect health infrastructure and the contribution by other stakeholders to the health sector.
Women’s Empowerment and Social Household Spending in Fragile States: Evidence from Chad
(African Economic Research Consortium, 2022-02) MABALI, Aristide; KINDA, Somlanare Romuald; MALLAYE, Douzounet
State fragility in Chad has been narrowly associated with insecurity due to a long cycle of violent conflict and recurrent droughts, leading to low social development. In this paper, we have investigated the impact of women’s empowerment on household social expenditures using data from the Chadian household consumption and informal sector survey carried out in 2011, and Propensity Score Matching as empirical model. The social expenditures used as outcome variables are education, health and food. We find that social expenditures are higher when a household is headed by a woman than when it is headed by a man with similar observed characteristics. In particular, differences between female-headed households and male-headed households are higher in food expenditures after controlling for observed characteristics (covariates). The results also show that there is a composition effect in household expenditure. While female-headed households spend their incomes in social sectors (health, food and education), those headed by men spend for temptation goods (alcohol and leisure). These results hold when we control both model specification and common support hypothesis. Our findings provide decision makers with economic policy tools to promote the social development focusing on women’s empowerment.
Youth Employability and Peace-Building in Post-Conflict Côte d’Ivoire: Evidence from a Randomized Controlled Trial
(2022-01) KIMOU, Assi José Carlos; BARRY, Ismahel Abdoul
This paper investigates the impact of alternative economic opportunities for the youth in consolidating positive peace. Using data from randomized control trial from a cash- for-work program for unskilled youngsters, with no opportunities in the labor market, we capture the causal effect of employment on social cohesion and trust in institutions in post- conflict Côte d'Ivoire. We estimate the short term and midterm impacts of the program from a sample of 4,160 youngsters randomly drawn including 3,125 beneficiaries and 1,035 in the control group in 16 municipalities nationwide. We also include in the analysis the prediction of youth behavior in favor of peace conditional to their participation in the program by running a LASSO model. In the short term, participation in the program decreases the odds to trust out-community youth by 29% and the odds to trust colleagues by 16%. In the long term, having a paid job significantly increases the likelihood to attend community meeting by 20%, trust in family members by 17% and trust in colleagues by 25%. Further, participation in the program is found to significantly predict behavior to peace. Lastly, while training in entrepreneurship negatively predict social cohesion, training in paid-job positively predict attitude to peace.

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