The Impact of Public Debt on Economic Growth in Ghana (1965 – 2017)

Abstract

The aim of this study is to examine the trend of public debt, economic growth, and the relationship that exists between debt (both external and domestic) and growth in Ghana using time series data from 1965 to 2017. Based on this data, this study found that the economic growth rate in Ghana has been fluctuating, with a record gross domestic product (GDP) growth of -12.4% recorded in 1975 attributed partly to the political instability at the time (Coup d'état). The debt level for the year 1965 was 25.16% of GDP as against 16.47% of GDP in 1975. From 1986 on, the nation saw steady and good economic growth, but in 2000, the trend of government debt peaked (111.95% of GDP). The study also found that for about a decade in 2000, Ghana's economy suffered its worst growth performance when real GDP growth dropped to 3.7 percent. This poor performance in 2000 was attributed to the deterioration in trade with gold and cocoa, the key export earners of the country, falling as the price of crude oil— the main import commodity of the country — rose rapidly. Thus, from 1965 to 2000 there has been a downward and upward trend in the country’s public debt and growth and a relatively stable trend have followed afterward. The study used the Ordinary Least Square (OLS) Model to establish the relationship between public debt and economic growth, with robust standard errors. This study found a positive correlation between public debt and economic growth for the era under consideration. In this study, the various independent variables (population growth, expenditure, inflation, trade openness, and government investment) were also controlled. After controlling for these variables, the study shows that trade openness and government investment are positively linked to economic growth and inflation is negatively linked, with no relation between government expenditure and economic growth in Ghana. All in all, the robustness test indicated that public debt which is the variable of interest significantly influenced economic growth in Ghana in the year under review.