Abstract
Governments have the zeal to meet the developmental needs of their countries but due to their inability to raise the necessary revenue to commensurate their expenditure, the fiscal balance of their countries has deteriorated. The surge in the public debt of Ghana has caused much anxiety on the sustainability of such fiscal measures. The study is set out to investigate if Ghana’s debt is sustainable in the long-run and also ascertain if the solvency condition holds for the country. Secondary data spanning from 1990 to 2016 was used. The Autoregressive Distributed Lag (ARDL) method was adopted to estimate the relationship between the variables. The study found that fiscal policy makers react to rising debt levels by adjusting primary balance by 0.087% when debt rises by 1%. Since this satisfies the intertemporal government budget constraint (IGBC) condition it was then concluded that the debt level of Ghana is sustainable. Government expenditure and its revenue cointegrate at 5% significance level and a unit increase in government revenue pushes government expenditure by 0.73%. Also the expenditures reaction to increase in revenues satisfies the Wald test restriction a1 = 1, implying that the solvency condition holds for Ghana. It is recommended to fiscal authorities to check primary fiscal balance through the business cycle in order to foster stable and higher economic growth while ensuring debt is also sustainable.
Highlights
IntroductionThe deficit created as a result is often financed through borrowing from domestic sources, external sources or the central bank
The study tested for the stationarity of the variables by the use of Augmented Dickey-Fuller (ADF) and the Phillips-Perron (PP) to find out if unit root is present in the times series dataset
Test Results for Long Run Relationship To get a different perspective of the sustainability of debt issues in Ghana, the study performed a simple regression of government expenditure and its revenue
Summary
The deficit created as a result is often financed through borrowing from domestic sources, external sources or the central bank This incessant dependence on loans to finance Ghana’s fiscal deficit has seen the debts rise over the years. The debt burden surged to 76 percent in 1994 and sharply declined to 57 percent in 1998 This could not be sustained as the public-debt-to-GDP ratio increased to 78 percent in 1999. Within these periods GDP growth averaged around 4.21 percent between 1994 and 1999. The debt ballooned to 112 percent of the GDP This abnormal surged, raised more anxiety on the sustainability of the debt burden. Afterwards the country recorded marginal decreases of the public-debt-to-GDP ratio from the 112 percent in 2000 to 87 percent, 82 percent and 74 percent from 2001, 2002 and 2003 respectively
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