The Effect of Ghana’s External Debt on Economic Growth

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Date
May 2016
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Abstract
Ghana’s external debt has been on the increase due to the dependence of the Government on international capital markets to secure loans to finance most of her expenditure. High external debts can erode confidence in economic reforms and thus diminish the sustainability of what might be an otherwise sound economic strategy. This study therefore investigated the effect of external debt on economic growth in Ghana. The study made use of data spanning the period 1970-2013 which was sourced from World Bank Development Indicators and International Debt statistics. The method of estimation was based on the Autoregressive distributed Lag (ARDL) model. The study established the existence of a long run relationship between economic growth and external Debt in Ghana. In the long run, the external debt-GNI ratio – a measure for debt overhang is correctly signed (i.e. negative) and significant at the 1% level. The debt service-export ratio - a measure for debt overcrowding was also found to have a negative and statistically significant effect on economic growth at the 1% level. The effect of the debt service-export ratio was however severe than the debt service-export ratio in the long run. Gross domestic investment and population growth rate were also found to significantly affect economic growth in the long run. In the short run, the debt service-export ratio was again found to have a negative and statistically significant effect on economic growth at the 1% level. Gross domestic investment and exchange rate were also found to have a significant influence on economic growth in the short run. It is recommended that fiscal consolidation and discipline measures should be implemented to ensure that external debt are kept at levels at par with our debt servicing mechanisms. Also, our debt servicing mechanism needs to be revised where projects that are financed with external loans should be capable of generating returns which should be used to finance these loans.
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A thesis presented to the Department of Economics, College of Arts and Social Science In partial fulfillment of the requirement for the degree of Master Of Science In Economics
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