Effects of Public Debt on Economic Growth in Ghana: Evidence from an Optimal Threshold Analysis.

Abstract

This study aims to estimate a prudent level of debt-to-GDP ratio that characterizes sustainable medium-to long-term economic growth in Ghana. To this effect, the relationship between public debt and economic growth was analysed predicated on the rising literature of a debt Laffer-curve effect on economic growth. This effect is deemed to be non-linear in the sense that increases in public debt come with positive effects on economic growth, but only up to a certain threshold. Once this threshold is reached, the positive effects turn into negative effects, which can be daunting on economic growth. This study applied a non-linear term in an Autoregressive Distributed Lag (ARDL) framework to data spanning 1965 to 2018. Similar to other studies, the study found an inverted U-shaped relationship between public debt and economic growth in Ghana. This implied a non-monotonic effect of public debt on economic growth in Ghana. In addition, it was discovered that the optimal debt-to-GDP ratio beyond which public debt is not deemed prudent for sustainable medium-long run growth is 52.4 percent. By and large, the crossover of Ghana’s current public debt ratio above the estimated 52.4 percent does not bode well for long-term growth. Per this study, a debt-to-GDP ratio of less than 52.4 percent should be the policy anchor for public debt management to ensure economic growth.