ABSTRACTS

The aim of this study is to examine the trend of public debt, economic growth, and the relationship that exists between debt (both external and domestic) and growth in Ghana using time series data from 1965 to 2017. Based on this data, this study found that the economic growth rate in Ghana has been fluctuating, with a record gross domestic product (GDP) growth of -12.4% recorded in 1975 attributed partly to the political instability at the time (Coup d’état). The debt level for the year 1965 was 25.16% of GDP as against 16.47% of GDP in 1975. From 1986 on, the nation saw steady and good economic growth, but in 2000, the trend of government debt peaked (111.95% of GDP). The study also found that for about a decade in 2000, Ghana’s economy suffered its worst growth performance when real GDP growth dropped to 3.7 percent. This poor performance in 2000 was attributed to the deterioration in trade with gold and cocoa, the key export earners of the country, falling as the price of crude oil— the main import commodity of the country — rose rapidly. Thus, from 1965 to 2000 there has been a downward and upward trend in the country’s public debt and growth and a relatively stable trend have followed afterward.

The study used the Ordinary Least Square (OLS) Model to establish the relationship between public debt and economic growth, with robust standard errors. This study found a positive correlation between public debt and economic growth for the era under consideration. In this study, the various independent variables (population growth, expenditure, inflation, trade openness, and government investment) were also controlled. After controlling for these variables, the study shows that trade openness and government investment are positively linked to economic growth and inflation is negatively linked, with no relation between government expenditure and economic growth in Ghana. All in all, the robustness test indicated that public debt which is the variable of interest significantly influenced economic growth in Ghana in the year under review.

        Background

CHAPTER ONE INTRODUCTION

The debt crisis of the world in the mid-1970s and 1980s was a result of poor debt management policies between low and middle-income nations (Marquez, 2000). Oil production in these years were very high allowing countries to borrow externally without strict terms and conditions or unfavorable terms from donor countries and other international bodies. Debt acquisition in these periods were very high and the servicing of debt turn to be the main challenge for the emerging and less advanced states due to the increase in short term loans. Most of these countries acquire short term loans and invested in long term projects; thus, their inability to fulfill debt obligations on time (Marquez, 2000). Similarly, debtor countries were rolling over their huge debt due to the large balance-of-payment trigger in the 1973-74 oil crisis (Stambuli, 1998). This affected economic development, as developing countries tried to maintain the rate of growth and borrowed heavily to be able to afford oil imports and to finish the development projects initiated in the previous decade. The allocation for most of the projects by the government was mismatched with the financing maturity structure. That is, authorities take short term loans and invest heavily in long term projects. Thus, these countries are unable to retrieve these funds to settle their debt obligations (Krumm, 1985). It was an opportunity for most African governments who had never borrowed before to use the Euromarket platform to borrow a huge amount to finance their public expenditure (Krumm, 1985). However, advanced country investors ignored the imminent debt crisis, as they were extremely willing to settle long-term credits of developing nations with shorter maturities. For that matter, developing countries debt level increased suddenly from $130 billion in 1973 to about $612 billion for the year 1882 (IMF, 1984). The inability on the part of the

government of Mexico to settle its outstanding liability and other credits with the commercial banks in the U.S led to the debt crisis in developing countries in August 1982 (Wellons, 1987). Following this debt crisis, the issue of public debt is more topical now in most developed and developing countries which Ghana is not an exception, because of its negative impacts on economic development. This is attribute to government actions leading to reductions in private investment spending which reduces the initial incline of total investment. The effect is determined by domestic borrowing and the high levels of debt servicing using domestic revenue which is also declining. This was confirmed by the Ghana Debt Sustainability Report (2017) which showed that Ghana faces a high risk of debt distress, particularly, external debt (IMF, 2017). The report further explained that continual fiscal slippages such as breaching external debt threshold, ineffective debt and cash management are the factors influencing the debt issues experienced in the country.

According to the report, Ghana’s external debt constituted 66% of the total public debt, representing 59% increase since 2011 of which its gross financing needs in 2017 was 20%, which is above the 15% gross financing needs for developing countries. Government sources for funds via external or internal to finance its budget when its domestic revenues from taxes are inadequate (Owusu‐Nantwi & Erickson, 2016). According to Ogunmuyiwa (2010), the government is left with the choice of borrowing to finance its infrastructure project when tax revenue is inadequate and also political authorities do not want to conciliate macroeconomic stability by printing more money. Erickson and Owusu-Nantwi (2016), were of the view that Ghana’s tax system is fragile and thus, the country is unable to create sufficient funds from taxes to finance its budget deficits; hence, taxes are not seen as the appropriate measure for the financing of government expenditure. Ghana’s informal sector is not captured in the country’s tax system due to the insufficient information on this sector making it difficult for tax authorities to have a fair understanding of their economic activities and levy them for that reason (Bagahwa & Naho, 1995). However,

Caribbean Development Bank (2013) is of the notion that developing countries with poor tax systems and low incomes, consider debt as the suitable choice to funding its government budget; hence government debt serves a vital role in developing countries. It allows government fiscal policies in maintaining the level of economic stability to promoting economic development function well. The use of resources or cash in a country that has not, or in any way belongs to its owner but rather is an obligation embodied by a financial instrument or by any other formal equivalent is seen as public debt (Oyejide et al., 1985). The government can borrow either from the foreign or the domestic markets in order to meet its expenditures. By so doing, it crowd-out the private sector and further leads to financial instability if much of the borrowing is in the domestic market (Panizza et al., 2010).