Public Debt, Investment And Economic Growth In Ghana

Abstract

This thesis was motivated by the persistent growth in Ghana’s debt per GDP above the 60 percent sustainability threshold prescribed by the West African Monetary Zone (WAMZ) coupled with its low performance in terms of debt servicing. These two situations raise more concerns on how the country’s level of public debt can affect both investment and economic growth. Several studies carried out to investigate the relationship between the country’s level of debt and economic growth have yielded many results. This thesis provides an updated debtgrowth nexus, as well as investigating the use of investment as the basic channel through which public debt affects investment. Guided by the neoclassical growth model, the effect of public debt on economic growth is dependent on the effectiveness of investment made with the borrowed funds and the part of investment crowded out due to the macroeconomic effect of high debt on interest rate and investment. Based on the results obtained from the unit root test, the ARDL cointegration method was used to estimate the effect of public debt on both economic growth and investment in Ghana. From the estimated results of the thesis, there was a negative relationship between external debt and economic growth in both the short run and long run growth equations. In these growth equations, no relationship was established between debt servicing and economic growth. In the estimated short and long run investment models, no relationship was found between external debt and investment, as well as debt servicing and investment. These findings imply no “crowding out” effect for Ghana. Rising from the thesis’s results, it is recommended that government channels borrowed funds into productive ventures of the economy as this will help in generating output to finance its debt. In order to control the persistent rise in external debt, structural programs must be implemented to ensure efficient mobilization of domestic funds. It is also recommended that government pays serious attention to revising the export led growth strategy, adheres strictly to macroeconomic policies that ensures a stable and favourable exchange rate in order to propel trade and investment.