An Empirical Analysis of the Sustainability of Public Debt in Ghana

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 a 1 = 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.