Financial Stability Indicators and the Performance of the Economy of Selected West African Countries

Abstract

This study examined the relationship between financial stability indicators and economic performance in eight West African countries from 1996 to 2024. The aim was to analyze how measures such as capital adequacy, liquidity requirements, asset quality, management efficiency, lending rates, and central bank rates influenced real GDP growth. Foreign exchange stability and political stability were included as control variables to capture wider economic dynamics. The selected countries include Côte d'Ivoire, Senegal, Mali, and Niger from the Francophone group, along with Nigeria, Ghana, Sierra Leone, and Gambia from the Anglophone group. They were chosen for their regulatory frameworks, financial systems, and economic relevance, providing diverse market conditions for analysis. Data were obtained from central bank statistical bulletins and World Bank reports covering the period 1996 to 2024. The dataset included GDP growth, exchange rate movements, and banking sector stability. The study applied an ex-post facto design and utilized the panel Autoregressive Distributed Lag (ARDL) model to capture both short- and long-term effects of financial stability on economic growth. Diagnostic tests for stationarity, heteroskedasticity, and multicollinearity were also conducted to validate the results. Findings revealed that most financial stability indicators such as liquidity requirements, asset quality, lending rates, and central bank rates did not significantly affect GDP growth in the long run. However, capital adequacy had a strong short-term effect, indicating that strengthening capital buffers could enhance growth in the near term. Foreign exchange stability showed marginal positive effects in the long run, while political stability exerted a significant negative effect on GDP growth in the short run but this impact faded over time. The study concluded that financial stability measures contribute more to short-term growth than to longterm GDP performance in West Africa. It recommended reinforcing financial stability frameworks, particularly in fragile economies, and called for more research into external influences such as global shocks and governance quality. Overall, the study provides insights into the role of financial stability in promoting sustainable economic development across the region.