THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND PUBLIC DEBT: A THRESHOLD REGRESSION APPROACH IN GHANA

Abstract

Purpose– Ghana’s debt stock has been a subject of debate for a very long time. This study is to estimate the debt threshold level above which it will be detrimental to economic growth. Methodology– The study used a threshold autoregressive model introduced by Tong (1978) and Hansen (1996). The study employed timeseries data for thirty-one years from 1990 to 2020. Economic growth was measured by the Gross Domestic Product Per Capita (GDPPC). The study sought to answer the following question: What is Ghana's public debt threshold value? Findings– The data reveal that Ghana has a single public debt threshold value (i.e., structural breakpoint), implying that public debt and growth are not linear. The derived threshold regression model indicates a public debt threshold of 57.09 per cent, above which the growth rate of GDPPC is considerably retarded. In addition, below the threshold level, there is a statistically significant positive association between public debt and growth. Conclusion– This article concludes that low public debt is growth-enhancing, whereas public debt above the threshold value is detrimental to economic growth. Therefore, policymakers should focus on monetary policies that aid in maintaining public debt at a low level. However, this study makes the following recommendations to help sustain Ghana's expanding state debt: To begin with, the government should halt the accumulation of external debt, which incurs additional costs during periods of currency depreciation. Second, policymakers with decision-making authority should exert severe restraint on the growing cedi. Thirdly, the government should eliminate all wasteful spending. Finally, the government of Ghana should allocate its external debt appropriately for economic investment and maintain a strong debt management policy.

Keywords

• Ghana’s debt stock
• threshold
• economic growth
• policymakers

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