The external debt and economic growth nexus: empirical evidence in Ghana.
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Date
2016-09
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KNUST
Abstract
Developing countries are characterized by low savings and investments. Capital inadequacy therefore becomes a major problem for developing countries. International financial institutions such as IMF and World Bank together with donor countries were carried over by the success story of the Marshal Plan which was used to reconstruct the devastated Europe after World War II. If it worked for Europe then why cannot it work for other continents or countries? External debt to developing countries therefore came to the fore and was considered an important means to fill the savings-investment gap in developing countries. While majority of the reviewed empirical studies reveal significant positive impact of External debt on economic growth, quite a sizeable number of the reviewed literature reveal otherwise, making the whole issue ambiguous and inconclusive. The only known study on the subject in Ghana is about 16 years old and given the current public outcry about the level of debt in the country currently there is the need to examine the impact of the debt level on economic growth. The opposition party (NPP) warned of possible “Debt overhang” and “Crowding out” effects while the ruling party (NDC) claimed that external debt would positively influence economic growth through increased capacity of the country to import industrial inputs necessary for increased production and export. This study therefore seeks to examine empirically the relationship between External debt and economic growth in Ghana using a time series data spanning 1970 to 2014. Using the ARDL model it was found among other things that external debt has a significant positive impact on the economic growth in Ghana while Total debt service has significant negative impact on the economic growth in Ghana, implying the existence of Debt overhang and Crowding-out effects. While judicious use of External debt can help overcome some of the economic challenges in Ghana, its accumulation and service can seriously retard economic growth and so policy makers should use External debt with great circumspection so that the nation can maximize its full benefits while at the same time reduce to the minimal its negative consequences on the economic growth in Ghana.
Description
A Thesis Submitted To The Department Of Accounting And Finance In Partial Fulfillment Of The Requirements For The Degree Of Master Of Philosophy.