Effects of public debt on public infrastructure investment in Ghana

Benjamin Frimpong, Abel Fumey () and Edward Nketiah-Amponsah ()

Cogent Economics & Finance, 2024, vol. 12, issue 1, 2363460

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.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.

Date: 2024
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DOI: 10.1080/23322039.2024.2363460

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