Financing Cost and Private Investment in Ghana
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Date
2010-06
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University of Ghana
Abstract
This study has investigated empirically the effect o f Financing Cost on Private Investment in
Ghana, over the period 1970 - 2008. To this end, the variables used were classified as Cost
factors and Non Cost factors o f private investment, using the latter as control variables. The
private investment function derived is a variant o f the flexible accelerator principle designed to
account for the objective o f the study. It employed the Augmented D ickey-Fuller (ADF) test to
address the problem o f unit root faced in time series analysis. The long run estimate o f the
private investment function for Ghana was estimated using the Johansen co-integration
technique. The Error Correction model was used to determine the short-run dynamics o f the
variables used in the model.
The study found that all the cost factors (interest rate, inflation rate, exchange rate and budget
deficit) had negative and statistically significant impact on private investment in the long run.
On the other hand, in the long run. the non cost factors (credit to the private sector, real GDP and
public investment) impacted positively on private investment but external debt had adverse
effect. The results also found that with the exception o f the stock market variable, all the
variables used co-integrated with private investment. The study further revealed that not all the
variables used were significant in the long run, since variables such as public investment and
external debt had the expected signs but were not significant.
This study provided direct evidence that high cost o f financing is associated with low private
sector participation in investment activities in Ghana. Accordingly, the study recommended
among others that long term policies should be directed towards cost control and macroeconomic
stabilization in order to boost private investment in Ghana.
Description
Thesis(M.Phil)-University of Ghana, 2010