An examination of the relationship between public debt and economic growth: A focus on Ghana

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Ghana’s public debt has been rising for the entire post-independence era. The only time Ghana’s public debt fell was when there were international interventions in the form of debt relief such as the Multilateral Debt Relief Initiative (MDRI) in the 1990s. Despite the continues rise in public debt, economic growth has been moderate. In fact, according to the IMF, although Ghana’s debt was at an all-time high in August 2019, Ghana was also one of the four fastest growing economies in Africa in October 2019. This study investigated whether the surging public debt levels in Ghana is a credible challenge to growth similar to what occurred in Latin America and European countries. The study used an OLS regression model, the discrete threshold regression technique, and the Granger causality test to analyze the relationship between Ghana’s rising debt and its economic growth using data from 1970 to 2018. The discrete threshold regression technique was used to investigate nonlinear relationships between the variables. The study revealed that debt granger-causes growth (unidirectional). At debt-to-GDP ratio below 25 percent, growth is negative (-1.348), but becomes insignificant at debt threshold between 25 percent and 45 percent. However, when debt is above 45 percent of GDP, growth is significantly positive. Between 45 and 60 percent of GDP, growth is 3.21 percent, whiles when debt supersedes 60 percent of GDP growth is significantly around 6 percent. The study recommends prudent borrowing above 45 percent of GDP by the Ghanaian government to invest in productive sectors of the economy whiles ramping up efforts in formalizing the huge informal sector to spur growth.
Undergraduate thesis submitted to the Department of Business Administration, Ashesi University, in partial fulfillment of Bachelor of Science degree in Business Administration, May 2020
public debt, economic growth, Ghana, GDP