Financial development and public deficits in the CEMAC

This study examines the links between financial development and public deficits in the CEMAC. It draws on the theory of financial liberalisation and links financial development variables to budget deficits. The first part assesses financial liberalisation measures from a financial development perspective. First-generation measures did not improve the functioning of financial systems when measured against the baseline level. However, they did help to stabilise the banking system in the wake of the banking crisis of the late 1980s. The second part uses statistical tools to analyse the relationship between the extent of financial sector expansion and the levels of budget deficits. The correlation coefficients show that there is a strong statistical dependence between indicators of financial development and budget balances on an accrual basis. Causality tests mostly indicate a relationship running from the financial system to public finances.