How International Aid Significantly Influence Ghana’s Trade Balance

Abstract

Purpose: The study's goal was to ascertain the impact of foreign aid on Ghana's trade balance, the impact of the country's exchange rate on trade balance, and the causal relationship between foreign aid and trade balance in Ghana. 
 Methodology: Based on vector autoregressive (VAR) methods, descriptive and econometric analysis of time series data from 1982 to 2012 were conducted for the study. The existence of a link between foreign assistance and trade balance was examined using cointegration and causality tests. To ascertain how quickly economic equilibrium will shift from the short run to the long run, the Vector Error Correction Model (VECM) was used.
 Findings: The analysis found that the exchange rate has a favorable impact on Ghana's trade balance and that foreign aid has a negative impact on it. The study also showed a long-term connection between trade balance, exchange rate, and foreign aid as well as a bidirectional causation between foreign aid and Ghana's trade balance. According to the test for VECM, the transition from short-run to long-run equilibrium happened more quickly, at 1.43 or 143 percent.
 Recommendation: The study recommended the Republic of Ghana to undertake an import substitution program in order to decrease the volume of imports that have been contributing to the long-term trade imbalance. Instead of depending on unreliable foreign aid, export promotion policy should be a priority in order to generate sufficient foreign revenues. To accomplish these goals, the Ghanaian government should be intelligently prepared to remove all trade restrictions that Ghanaian exporters faced on the international market.