External Debt and Foreign Investment: An Empirical Analysis on the Economy of Ghana

Abstract

This study considers the impact of Ghana’s heavy external debt on its ability to attract foreign investment. The study uses data covering the period from 1991 to 2019. Foreign investment is measured using net foreign direct investment inflows, while external debt is measured using two indicators: public and publicly guaranteed external debt stock and long-term debt stock. Using the ARDL, we found that both external debt indicators have a substantial negative long-run influence on foreign direct investment inflows. On the other hand, economic growth, measured by the gross domestic product, has a substantial positive effect on foreign direct investment inflows. External debt has a detrimental impact on foreign direct investment, while improvement in the country’s economic performance promotes foreign direct investment inflows. The implication is that when funds borrowed are well utilized for economic purposes, it will neutralize the negative consequences of the debt, and the improved economic performance shall augment foreign investment inflows. These findings are essential for most developing economies, especially the African countries, which heavily depend on foreign loans. Policymakers should focus on strategies such as human capital improvement, innovation, and strengthening their legal systems that improve economic performance.

From Borrowing to Growth: Ghana’s Public Debt Strategy within its Financial Development Trajectory

“…This study is crucial as public debt is a significant issue worldwide, particularly in developing nations such as Ghana. It provides valuable insights into the connection between public debt and financial development, which can assist policymakers in achieving a balance between investments in infrastructure and social programs while ensuring long-term sustainability and financial stability [3,60,61,62]. Specifically, the study investigates the effects of public domestic and external debt, lending rates, inflation, and exchange rates on Ghana's financial development from 1992 to 2022.…”