An empirical analysis of the sustainability of Ghana's trade deficits

Abstract

Trends in the trade balance of Ghana show a consistent and excessive deficit in the Ghanaian economy (but for brief episodes of surpluses). The key concern regarding this trend is that Ghana could be on the path of insolvency as they build up excessive net foreign debt from financing the trade gap with capital inflows. Using the inter-temporal budget constraint model of Husted (1992), this study assesses the sustainability of Ghana's trade deficits via a test of the country's inter-temporal budget constraint. Employing time series data of Ghana for the period 1983-2012 and using the bounds testing approach to cointegration under the autoregressive distributed lag (ARDL) model, the study found the existence of a long-run relationship between Ghana's exports and imports. The results of the Wald's restriction test imposed on the long-run parameter indicate that Ghana fails to satisfy the sufficient condition for sustainability of its trade deficits. The study also established the existence of a bidirectional causality between Ghana's exports and imports both in the short run and the long run. The overall conclusion drawn from the study is that Ghana fails to satisfy its international budget constraint and that its trade deficits are unsustainable.