Empirical appraisal of fiscal stability: the case of Ghana

Abstract

Purpose

The purpose of this paper is to appraise the stability of Ghana’s fiscal policy by assessing government’s reaction in the past to rising public debt over the last three decades.

Design/methodology/approach

Using quarterly data spanning 1990Q1-2013Q2, the study evaluated the mean reverting properties of Ghana’s public debt and also estimate the fiscal policy reaction function. The complementary estimation techniques include Pesaran et al. (2001) bound testing cointegration test, differencing method and also Granger two-step cointegration methods.

Findings

Using quarterly data from 1990Q1 to 2013Q2, the study found the fiscal policy to be unstable in the 1990s, necessitating the adoption of Heavily Indebted Poor Countries’ initiative in 2001. The fiscal situation however relatively stabilizes afterwards following the external debt relief in 2001. Nevertheless, the study reveals that the recent fiscal policy (since 2006) seems to be confronted with tremendous fiscal pressures, exacerbated by fiscal excesses during election cycles as well as excessive domestic and external borrowings. In addition, the economic growth-debt link was found to be weak, though debt appears to adversely affect economic growth.

Research limitations/implications

The study does not thoroughly explore the possibility of non-linear relationship between public debt and primary balance. Also, the result could be different using different data frequencies.

Practical implications

The state of government finance has implications on the monetary policy and economic growth prospects of an economy. As an inflation targeting central bank since 2002, a successful monetary policy implementation that reins in inflation requires fiscal policy that curtails fiscal volatilities originating from imprudent behaviour of government. Therefore, the looming fiscal pressures in recent times would impair the effective implementation of the inflation targeting framework by the central bank, and also retard economic growth as the bulk of these expenditures are usually recurrent in the case of Ghana.

Originality/value

This is the first paper to employ complementary econometric techniques to empirically evaluate fiscal sustainability in Ghana.

Citation

Akosah, N.K. (2015), "Empirical appraisal of fiscal stability: the case of Ghana", Journal of Economic Studies, Vol. 42 No. 5, pp. 753-779. https://doi.org/10.1108/JES-03-2014-0045