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.

Keywords

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