ABSTRACT
This study investigated the long and short-run impact of external debt on economic growth in the context of Ghana using the sample period spanning from 1980 to 2016. The study also examined the Ghana’s external debt trend analysis over the sample period considered for this study. Theoretical and empirical evidences indicates that external debt can either exert negative or positive impacts on economic growth depending on how the external funds acquired is injected into the economy. The variables employed for this were found to be I(0) and I(1) and as result Autoregressive Distributed Lag bounds test to co-integration econometric technique was adopted.
The results of this study revealed that the external debt of Ghana has increased by 1,430% from 1980 to 2016. Also, external debt of Ghana was found to have positive significant impacts on economic growth of Ghana in the long run. The external debt servicing which is the cost of external debt was found to have negative insignificant impact on growth of Ghana. The study therefore recommend to policymakers to ensure that all external funding are injected into productive sectors of the economy in order to stimulate economic growth.
CHAPTER ONE INTRODUCTION
1.1 Background of the Study
Governments across the globe have a responsibility of financing their expenditures. They mostly depend on tax from citizens to finance expenditures, but revenue from tax alone seems to be insufficient to finance such expenditures. Therefore, governments mostly rely on public borrowing (Public debt) to bridge the gap between what they receive and their expenditures (Safdari, Keramati, & Mahmoodi, 2011). Public debt is the total of a country’s debts which includes domestic debts and external debts (Maku, 2009). Domestic debt is a stock of fund which is borrowed by the government inside the country while an external debt is a stock of fund lent by foreign countries or international financial institutions to another country per a period of time.
The 2006/2007 global credit crunch put many economies into latent danger. Private debts which significantly lubricate the wheels of economies have fallen drastically and left several economies near collapse (Reinhart & Regoff, 2010). To resuscitate their economies and rescue the financial sector from collapse, many governments increased their debt. Consequently, the financial crisis resulted in more or less a government debt crunch. The theory on macroeconomics indicated that greater degree of public debt results in stagnation of economic growth through crowding out private investment, greater inflation, greater future nuisance taxes, higher volatility and general vulnerability of the economy to little shocks such as changes in commodity prices world-wide (Cecchetti et al., 2011). The empirical results lend credence to this. According to Reinhart and Regoff (2010), moderate levels of debts improve economic growth; nevertheless, too much debt
could be detrimental to welfare. In line with this, the Eastern and Central European economies signed the Maastricht agreement to restrict member countries from exceeding certain levels of debts. The Maastricht agreement requires member countries not to accumulate debts exceeding 60 percent (%) of GDP.
