The Fiscal Multiplier Effect: A Quantitative Analysis of Government Spending’s Impact on Economic Growth in Sierra Leone

This study quantifies and compares the macroeconomic effects of public consumption versus public investment in Sierra Leone, a fragile post-conflict economy facing severe fiscal constraints, where understanding the core drivers of growth is paramount. We employ the Structural Vector Auto-regression (SVAR) approach, utilizing annual time series data from 2000 to 2024 to estimate the fiscal multipliers individually. Methodologically, this study contributes by estimating two separate SVAR models with different identification schemes, one for consumption and one for investment, implementing two separate theoretically grounded recursive identification schemes, arguing that recurrent consumption and discretionary capital expenditure differ fundamentally in both their policy response functions and information lags. Our findings revealed a remarkable counterintuitive ordering of fiscal impacts. Our estimations indicate that the peak multiplier for recurring public consumption expenditures is approximately 3.96, signifying a prevailing short-term aggregate demand-side effect, likely driven by an extreme liquidity challenge and a high marginal propensity to consume among households. In contrast, the peak multiplier for government investment is approximately 0.98; this serves as the fundamental puzzle of our study, suggesting that capital expenditure, on average, is unable to generate sufficient economic returns to offset its own investment cost. We conclude that consumption offers a powerful short-term fiscal stimulus and suggest that for Sierra Leone to adequately and efficiently realize all the gains identified, the relevant regulatory authorities must strengthen and improve the public investment management Public Investment Management (PIM) frameworks.