Abel Fumey, William Bekoe, Abubakari Imoru


This study empirically examines the effects of external debt servicing on capital formation in Ghana. Using data from 1980 to 2019, the study estimates the Autoregressive Distributed Lag (ARDL) model and finds that the effect of external debt servicing is negative both in the long and the short run due to the tax disincentive effect. This suggests that as a result of the potentially high debt servicing due to the high debt stock, any future investment may attract high marginal tax rates and would tend to reduce investment in the economy. The result further shows that external debt servicing affects private capital formation more than public capital formation. However, the effect of the external debt stock on private investment is negative in the long run but positive in the short run confirming the direct effect of the debt hypothesis’ existence in Ghana suggesting that external debt discourages a long-term investment which is critical for economic growth. Additionally, there exists complementarity between public and private investments indicating that some public investments attract private ones into the country. Therefore, external debt service payment crowds out private investment through excessive interest charges, so government should determine a threshold of borrowing in order to minimize the high debt servicing.


JEL: E22, E31, E62, F31, G31, H63, P24


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external debt, capital formation, tax disincentive effect, ARDL, Ghana

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DOI: http://dx.doi.org/10.46827/ejefr.v6i1.1272


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