Commodity price shocks and fiscal imbalance in Ghana

Abstract

This study investigated the impact of commodity price shocks on fiscal imbalance in Ghana. The study covered the period of 1990 to 2013 where the country experienced high fiscal imbalance and external debt that led to the HIPC initiative to sustain the debt burden and macroeconomic stability. The Vector Error Correction approach to cointegrationwas used with quarterly data from Bank of Ghana, WDI and ADI. The Impulse Response Analysis from a Bayesian VAR was done to analyse shocks of commodity prices (gold and cocoa), terms of trade, capital formation and the response by fiscal imbalance.Results from the study suggest that commodity price (gold and cocoa) negatively affects fiscal account implying fiscal imbalance in both short and long run. Consumer price Index and interest payment on external debt negatively affect fiscal imbalance in the long run and fluctuate at different time lags in the short run. Terms of trade and gross fixed capital formation both suggested positive effect on fiscal imbalance in the long run and short run. Surprisingly, positive commodity price shocks increase negative fiscal imbalance. Positive shocks of terms of trade and capital formation affect fiscal imbalance both positively and negatively.The study recommended mobilizing more revenue by way of value addition to exports, export diversification, controlled inflation and debt borrowing, private investment and reduction in non-essential expenditures of government.