From Borrowing to Growth: Ghana’s Public Debt Strategy within its Financial Development Trajectory

Purpose: The study examined the implications of Ghana’s soaring public debt on its financial development, specifically its banking behaviour. Given Ghana’s alarming public debt of 78.3% of GDP by 2022 and previous periods of high public debt correlating to global economic downturns, understanding this relationship is vital for both local and international policymakers.

Methodology: The research employs annual growth rates of various financial development indicators (e.g, Ease of Doing Business Index and Digital Transaction Index) and measures public debt using the Public Debt-to-GDP Ratio. Advanced econometric methods were used to ensure data accuracy, including cointegration, error correction models, and tests like Dickey-Fuller, Augmented Dickey-Fuller, and Sargan-Rhargava Durbin-Watson.

Findings: The ADF test confirmed the stationarity of all study variables. Cointegration tests show a long-term equilibrium relationship among the variables. In the short run, a positive and significant relationship exists between variables such as Domestic Bank Intermediation, Financial Development, and Public Debt. Regression outcomes indicate that as Public Debt escalates, there’s an associated increase in Financial Development in Ghana.

Implications: These findings reveal that despite the potential pitfalls of high public debt, a complex dynamic exists where increasing public debt positively correlates with financial development in Ghana’s short run. This insight can be valuable for policymakers in balancing infrastructural investments, social programs, fiscal sustainability, and financial growth, especially for developing nations facing similar debt scenarios.

Originality: This study offers a unique, in-depth three-decade analysis (1992-2022) on the relationship between Ghana’s public debt and banking behaviour. It is an empirical precedent for other nations to understand the intricate relationships between public debt and financial growth.