Analyzing Debt Dynamics in Ghana Amid Rising Interest Payments: Implications for Fiscal Sustainability.

Borrowing has historically been a fallback position for countries to bridge the gap between revenues and expenditures. This has made public debt a crucial financing tool. Therefore, understanding a nation’s debt situation and trajectory is crucial for assessing the economy’s strength. This study explicitly examines the macroeconomic variables that impact the debt dynamics in Ghana. It delves into two critical areas of literature: (i) debt dynamics and (ii) the integration of shocks. Using an accounting framework, the debt dynamics reveal that interest payments have driven much of the recent debt increase. Using a vector error correction model, the study incorporates economic shocks employing forecasting error variance decomposition to analyze their effects. Notably, exchange rates and revenues were found to impact debt significantly, even before accounting for interest payments, which was a surprising finding compared to the traditional accounting view. The work also uses cointegration techniques showing shortand long-term relationships between public debt, interest payments, and other macroeconomic variables. The autoregressive distributed lag approach further confirms these relationships. The study provides valuable insights into the complexities of debt dynamics in Ghana and offers essential policy initiatives to ensure that the country progresses toward fiscal and debt sustainability.