The Effects Of Public Debt On Economic Growth

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Data released by the Bank of Ghana (BOG) recently showed that Ghana’s debt stock rose to GH¢ 97.2billion (or US$25.6billion) in December 2015, equivalent to 72.9% of the year’s total economic output, measured by the Gross Domestic Product (GDP). Out of this, total external debt amounted to GH¢57.8billion (43.4% of GDP) and domestic debt was GH¢39.4billion (25.2% of GDP). That means, in nominal terms, based on population projections by the Ghana Statistical Service; for every man, woman, and child living in Ghana owe about GH¢3,512.81 in government debt compared to GH¢872.99 as of 2011. As government run budget deficits, mainly leading to the rise in the debt level; servicing the debt comes with severe consequences. Most research has shown…show more content…
A country burdened with an enormous debt means tax increases in the near-term to finance debt and its interest payments —consuming most of government revenues and crowding-out investment in priority areas such as education and health care. Such country is susceptible to external shocks such as global recession or financial crisis and most importantly, the country leaves an obligation that will pass along to the next generation. Conventionally, a good measure of the sustainability and accumulation of a country’s debt is to consider the debt level to the overall economic output of the country measured by the GDP (known as the Debt-to-GDP ratio). The graph below shows the historical debt-to-GDP ratio of some selected African countries in the Sub-Saharan region over the past 10 years. Source: Within the last 4 years, Ghana total debt stock rose to GHS97.2billion (72.9% of GDP) at the end of 2015, up from GH¢24billion (42.2% of GDP) as at the end of 2011. This represents a very momentous increase within 4 years. Comparing the current Debt-GDP-ratio to other selected countries in Africa (as shown in the graph), within the past 3 years, Ghana has had the highest Debt-to-GDP ratio. A notable research published in the most prestigious economic journal, American Economic Review, using data spanning over 44 countries found that across both advanced countries and emerging
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