The impact of external debt on economic growth and investment in Ghana: 1984 - 1999
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Date
2002-11-29
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Abstract
External debt of many low-income developing countries has increased significantly in the past two decades. The debt burden places severe constraints on the economic recovery of a group of severely indebted low-income countries (SILICS) currently classified as HIPCs, despite years of structural adjustment efforts. With economic performance stagnating around 4.5% of GDP, debt servicing continues to put serious fiscal constraints on government budget, limiting resources available for public investment in basic services which should crowd in private investment.
This study presents a country case study of Ghana’s external debt profile (magnitude, term-structure, sources and determinants.) and its impacts on economic growth and investment.
The descriptive analysis of the debt reveals that Ghana’s external debt is mainly official debt from multilateral sources. Public sector debt constitutes over 90% of long term debt outstanding, indicating that the public sector (government) plays a dominant role in the social economic development of Ghana.
The findings also indicate that debt to export and debt to GDP ratios are highly unsustainable (indicating a debt overhang problem) while total debt service ratios are relatively low.
Using time series data for the period 1984 to 1999, the study found that external debt accumulation has a negative impact on economic growth and investment- revealing the existence of a debt overhang problem.
The results generally did not support a ‘crowding out’ effect of debt servicing on GDP growth and investment. Government fiscal deficit was found to work against both investment and GDP growth. Macroeconomic stability and credible policy (measured by inflation and real exchange rate) have positive impacts on investment and growth.
From policy perspective, the excessive debt overhang problem implied that the country is insolvent and needs debt relief under the current enhanced-HIPC initiative. Debt relief under the HIPC initiative, however, needs to be complemented with fiscal discipline, institutional reforms, and credible macroeconomic policy implemented on a sustained basis to rebuild investor confidence and attract private investment to Ghana.
Description
A thesis submitted to the Department of Economics and Industrial Management,
Kwame Nkrumah University of Science and Technology in partial
fulfilment of the requirements for the award of Master of Arts degree in Economics, 2002