External Debt and Economic Growth in Ghana: A Co-integration and a Vector Error Correction Analysis

This paper employed a co-integration analysis and an error correction methodology to examine the impact of external debt on economic growth in Ghana using annual time series from 1970-2017. Estimates show that our normalized long-run co-integrating growth equation coefficients do not differ from our short-run vector error correction coefficients for our variables of interest. Findings are that external debt inflows stimulate growth in Ghana both in the long-run and short-run. Secondly, our study also confirmed the crowding out effect, debt overhang effect and the non-linear effect of external debt on economic growth in Ghana. From the perspective of policy, we advocate for a judicious allocation of the debt resources such that the cost of servicing the debt will not skew resources away from investment which in a medium to long-term will be inimical to growth.