Empirical Anaiysis Of External Borrowing Impact On Economic Growth In Ghana

The intent of this work is to ascertain the impact foreign debt has on economic growth in Ghana.The study covered a period of 45 years(1970-2014),used annul time series data for the empirical analysis.The principal sources of data are mainly secondary and include World Bank,IMF,and Bank of Ghana,Ghana Statistical Service and Ministry of Finance.The variables employed in the study are real GDP which serves as the indicator of economic growth,external debt stock(EXDS)as an indicator of debt burden,external debt service(EXDSVIC)to find out whether there is capital drain from the Ghanaian economy.These are the principal variables compared to real gross domestic product to establish their relationships.Other economic variables included in the study are price of foreign currency(PXF),exports(EXPT)and gross capital formation(GCF).First of all,unit root test was done to find out whether the variables were stationary or not and their order of integration by using the Augmented Dickey-Fuller(ADF)test and the results indicated that,variables were stationary at first difference.Once variables were stationary at first difference,the study went on to find out the relationship between variables in the long run by using Johansen-Cointegration technique and both Trace and Max-Eigen value statistics indicated there was at most 1 cointegration equation indicating that,there is a long run relationship between the variables.When the OLS model was estimated to ascertain the effect external debt has on economic growth in Ghana,the result indicated a positive relationship between RGDP and EXDS.A 1% change in EXDS leads to an increase in RGDP by about 0.00% an indication that,EXDS has a very minimal impact on RGDP.Also the positive sign indicates that there is no debt burden in Ghana.However,there is a negative relationship between RGDP and EXDSVIC signifying that,there is capital drain from the Ghanaian economy.The result indicated a 1% change in EXDSVIC leads to a decrease in RGDP by about 0.063%.The results further shows that,a 1% change in EXPT and GCF leads to an increase in RGDP by about 0.058% and 0.067% respectively.Both variables equally indicated having positive relationships with RGDP respectively.PXF equally showed having a positive relationship with RGDP.It was estimated,a 1% change in PXF made RGDP to increase with about 0.016%.The fraction of sample variation in the dependent variable explained by the independent variables(2R)was about 99.7%.A causality test was done by using Granger-causality test technique to ascertain whether RGDP cause EXDS and the vice versa.The test results revealed that there is unidirectional causal relationship between the two variables,EXDS granger-cause RGDP.For a better understanding of the channel through which external debt can impact growth,the study compared the relationship between exports and external debt stock in Ghana.The regression results indicated a positive relationship between EXPT and EXDS.A 1% change in EXDS leads to an increase in EXPT by about 0.55% all things being equal.Also,GFCF indicated a progressive relationship with EXPT.A 1% change in GFCF leads to an increase in EXPT by about 0.45% all things being equal.The fraction of sample variation in the dependent variable explained by the independent variables(2R)was about 92.1%.Considering the findings of this work,the following recommendations are made to aid policy formulation to help minimize external borrowing,debt servicing management as well measures to ensure consistent real GDP growth.First of all,the results indicated that,there is a positive relationship between economic growth and external borrowing even though their effect is very minimal.It is therefore recommended that,contracted foreign loans should be invested in capital goods of high returns to ensure vigorous economic growth.Secondly,the findings indicated that,external debt servicing has a retrogressive effect on economic growth in Ghana.Therefore,it is suggested that,contracted foreign loans should be invested in capital projects that do not take a very long gestation period to start yielding the expected returns.In addition,externally sourced funds should be applied to projects with high returns so that the cost of the project can be met whiles the profit can be used to service these loans instead of increasing taxes in the domestic economy to raise enough revenue to service these loans which do not only prohibits investment in the economy but also compel potential investors to invest their capitals outside the economy hence capital flight.Similarly,it is also recommended that,the debt management division of Ministry of Finance should go strictly by the debt servicing schedules to reduce unnecessary delays because the more the delay,the more interest is accumulating which is a bane to economic growth and that is why this variable indicated negative.It is further suggested that,once Ghana depends on commodity prices as sources of foreign exchange,value should be added to export commodities before exporting them so that more foreign change can be earn to supplement domestic savings for investment which will in a way help reduce external borrowing of funds for investment in the domestic economy as well reduce the trade deficit nature of the Ghanaian economy hence growth.