The relationship between external debt and agriculture GDP growth in Ghana: an ARDL cointegrating bound testing approach

Ernest Sogah, Joseph K. Tuffour, John Kwaku Mensah Mawutor and Freeman Christian Gborse

Cogent Economics & Finance, 2024, vol. 12, issue 1, 2330426

Abstract: The relationship between external debt and agriculture productivity is a topic of significant importance in developing economies. Agriculture is a fundamental sector in these economies, often providing livelihoods for a substantial portion of the population. External debt, on the other hand, is a commonly used financing mechanism for economic development. Understanding how these two variables interact is crucial for policymakers because it has far-reaching implications for food security, poverty reduction, and overall economic stability. The main objective of this study is to establish the relationship between external debt and agricultural GDP growth in Ghana. The Augmented Dickey Fuller and Phillips-Parron tests and the autoregressive distributed lag (ARDL) to co-integration bound testing approach were employed for the econometrics analysis from 1980 to 2019. The study revealed a direct and significant effect of external debt on agricultural GDP growth in Ghana. This implies that external funds were optimally channeled and used to stimulate agricultural output. The results indicate that external debt servicing has a positive effect on agricultural GDP growth, suggesting that Ghana is capable of always fulfilling its debt obligation. The study’s key contributions are that the paper is the first to investigate the link between external debt and agricultural GDP growth in Ghana. Furthermore, the study has indicated that external debt is a catalyst to augment agriculture GDP growth in Ghana. Finally, we investigate the long -term effect of the variables of interest on agricultural GDP growth.The finding that external debt has a positive and significant effect on agriculture GDP in Ghana carries substantial implications for both policymakers and stakeholders in the agricultural sector. This result underscores the critical role that external borrowing plays in driving agricultural growth and development in the country.First and foremost, this finding suggests that external financing channels, such as loans and grants from international financial institutions or bilateral donors, can effectively stimulate investment in the agricultural sector. These funds can be utilized to finance crucial initiatives aimed at modernizing agricultural practices, improving infrastructure, enhancing productivity, and promoting value chain development. As agriculture remains a vital sector of Ghana’s economy, contributing significantly to employment, food security, and rural livelihoods, the positive impact of external debt on agriculture GDP signifies the potential for sustainable economic growth and poverty reduction.Moreover, the positive association between external debt and agriculture GDP implies that prudent debt management strategies, coupled with targeted investment in agriculture, can yield favorable outcomes for Ghana’s overall economic performance. By strategically leveraging external resources to bolster agricultural productivity and competitiveness, Ghana can capitalize on its comparative advantage in the sector, diversify its export base, and reduce dependency on imports, thereby enhancing resilience to external shocks and fostering long-term economic sustainability.Additionally, the significance of external debt in driving agricultural GDP underscores the importance of aligning debt-financed projects and programs with national development priorities, particularly those outlined in Ghana’s medium to long-term agricultural development strategies. This entails ensuring that borrowed funds are allocated efficiently, transparently, and equitably across different segments of the agricultural value chain, with due consideration for environmental sustainability, social inclusivity, and gender equality.

Date: 2024
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DOI: 10.1080/23322039.2024.2330426

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