International Debts and Implications on Ghana’s GDP Growth. Annual time series data (1980-2014)

Abstract

Development projects are at the heart of government borrowing, with the goal of transforming the economy. However, excessive borrowing has resulted in a massive debt for Ghana. As a result, this research aims to examine, using annual time series data, the trends and effects of Ghana's external debt and service on GDP growth from 1980 to 2014. Aside from GDP, the variables that were analyzed included gross domestic investment, population, foreign direct investment, openness to trade, and the ratios of external debt to GDP and the percentage of GDP used to service that debt. Exogenous Solow growth models were used to examine the effects of external debt burden on GDP growth separately from those of the standard Solow growth model. Two different models are being used, one to look at what is causing an increase in the country's external debt and how that will affect GDP, and the other to look at how servicing that debt will affect GDP growth. OLS estimation method was used, backed by Bruesch-Godfrey test, Koenker-Basset (KB) test statistics, Cobb Douglass estimation function, and STATA statistical package (version 2012) for the regression analysis. Tests for autocorrelation and heteroscedasticity were passed by the models. For both models, the R2 value and F-statistic (Prob>F 0.000 is less than 0.05) indicate that the independent variables account for approximately 99.51 percent of the GDP variation. For the sake of comparison, we can see that all but one parameter in both models is statistically significant (the population coefficient in the second model). According to Simon (1987), Todaro and Smith (1990), and others, GDP and population (POP) have a positive and significant relationship, as do gross domestic investment (INV) (2012). Foreign direct investment (FDI), the external debt ratio (EXD), and the debt service on the country's external debt are all positive, as predicted a priori; however, all four of these variables are negative. Despite this, the coefficient of external debt to GDP is higher than the coefficient of debt service on external debt. An increase in external debt of 1 percent of GDP results in a 0.2285 percent reduction in GDP, whereas an increase in external debt servicing costs results in a 0.069669 percent reduction in GDP. This means that Ghana's external debt should be constantly monitored by the government, and debt should not be allowed to exceed a maximum limit in order to avoid overhanging debt. The government must properly monitor funds to ensure that they are used only for the intended purpose. As a second step, the government of Ghana should concentrate on other strategic economic areas. Because of their high multiplier effect, investments in infrastructure, agriculture, and other sectors should be prioritized. As a result, the total amount of debt owed will be reduced. Finally, Ghana's economy can't solely rely on its external, or foreign, debts, which are always a drag on growth. To determine whether or not they need additional financing, the government should compare their economy's health to fiscal discipline, which governs fiscal policy.