Modeling energy prices and inclusive growth in Sub-Saharan Africa: Potential transmission pathways

Abstract

Inclusive growth in sub-Saharan Africa (SSA) faces persistent challenges from structural vulnerabilities and external shocks, notably volatile global energy prices. These shocks disrupt macroeconomic stability, hinder poverty reduction, and restrict access to essential services, and are further exacerbated by dependence on imported fuels. Despite the complex transmission of energy price shocks through indirect macroeconomic channels, empirical evidence on these pathways remains limited. This study examines the impact of global energy price fluctuations on inclusive growth in 33 SSA countries and six oil-exporting countries from 1996 to 2020, using two-step System GMM and Panel ARDL methods. An Inclusive Growth Index is constructed via composite PCA, encompassing eight dimensions and 34 indicators. Results indicate that rising energy prices reduce investment, household and government consumption, employment, shadow economy activity, and CO₂ emissions, while increasing exchange rate depreciation and inflation, yielding a net negative impact in the short run (−0.0075 %) and the long run (−9.427 %). In oil-exporting SSA countries, energy prices negatively affect inclusive growth through investment, government spending, employment, shadow activity, and inflation, but positively influence it through exchange rates, household consumption, and CO₂ emissions, resulting in a net negative effect (−0.049 %). Overall, inclusive growth in SSA follows an inverse-S trajectory with a negative net effect. The study recommends that oil-importing countries expand targeted subsidies, promote off-grid solar solutions, and encourage private sector participation through blended finance and public-private partnerships. Oil-exporting countries should strengthen sovereign wealth funds, allocate energy windfalls to industrial diversification, and boost clean energy investment. Channel-specific interventions are also proposed.