Effects of public debt on public infrastructure investment in Ghana

Abstract

Though studies abound on the relationship between public debt and other macroeconomic variables, research on the effects of public debt on government infrastructure investment, particularly in Ghana has not received much scholarly attention. Therefore, this relationship is explored in this study by using the Non-linear Autoregressive Distributed Lagged (NARDL) model for an annual dataset from 1983 to 2020. The findings indicate a positive correlation between foreign debt and infrastructure investments in both the short-run and the long-run suggesting that foreign debt have more significant impact on public infrastructure investment than domestic debt, highlighting the crucial role of foreign debt in financing Ghana’s infrastructure investments. In the long-run, the study finds a positive asymmetric link between foreign debt and public infrastructure. In particular, a rise in public infrastructure investment by 3.1% increases external debt by 1.3% as foreign debt has a higher effect on public infrastructure investment in the long term. Additionally, public expenditure has a positive effect on public infrastructure investment in the long run whereby a 1% increase in public spending leads to 2.06% rise in public infrastructure investments. The study further identifies a positive asymmetric impact of public debt on public infrastructure investment in Ghana. For policy purposes, the study suggests that government directs public debts to economic projects through capital formation, rather than for consumption purposes. It further advocates for prudent debt management by investing more in capital projects to enhance production and good returns.

Impact statement

This study examines the relationship between public debt and public infrastructure investment in Ghana by adopting a Non-linear Autoregressive Distributed Lagged (NARDL) model for a data spanning 1983 - 2020. The findings of the study reveal that there is a positive relationship between public debt and infrastructure investments in the short-run and the long-run. The study further reveals that there exists a positive asymmetric impact of public debt on public infrastructure in Ghana. The study suggests that political and economic decision-makers should enhance public debt expansion for positive effect on infrastructure. The main policy suggestion of this study is that Government should set up systems to monitor borrowed funds, improve debt management by allocating more resources to essential public infrastructure as well as ensuring that foreign loans are invested in projects that yield sufficient returns.

Keywords:

• Public debt
• infrastructure investment
• non-linear ARDL
• government expenditure
• Ghana

JEL CLASSIFICATION CODES:

• H
• H6
• H63
• E62
• C22

REVIEWING EDITOR:

• Chris Jones, Aston University, UK

SUBJECTS:

• Economics
• Macroeconomics
• Finance

Authors contributions

Bejamin Frimpong: conceptualization, estimation and results interpretation, manuscript writing, and editing. Abel Fumey: conceptualization, abstract, introduction, software application, data collection, preliminary estimations, revised draft, conclusion and policy implications, manuscript writing, and editing. Edward Nketiah-Amponsah: literature review, data scrutiny, results and discussion, manuscript writing, and editing. All the authors approved the final version of the manuscript. The authors take full and collective responsibility for any omissions and commissions found in this article.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data that support the findings of this study are openly available at https://databank.worldbank.org and https://data.imf.org.

Additional information

Funding

No funding in any form was received in preparing and coming out with this study.

Notes on contributors

Benjamin Frimpong

Benjamin Frimpong holds MPhil in Economics from the University of Ghana, Department of Economics and currently a Research Assistant at the University of Ghana Business School.

Abel Fumey

Dr. Abel Fumey holds a PhD in Economics from the University of Ibadan and currently a Senior Lecturer at the Department of Economics, University of Ghana.

Edward Nketiah-Amponsah

Prof. Edward Nketiah-Amponsah is a Full Professor of Economics at the Department of Economics, University of Ghana. He obtained his PhD from the University of Bonn in Germany.