The effects of high indebtedness on natural resources extraction in Ghana

Abstract

The relationship between natural resource and indebtedness is central to achieving sustainable development. While several studies have explored the relationship between natural resources and public debt at cross-country levels, there has been limited focus on country-specific analyses, particularly for resource-rich nations like Ghana. Thus, this paper provides empirical evidence on the impact of high public debt on natural resources extraction in Ghana. Using time series data from 1980 to 2023, we employ the Fully Modified Ordinary Least Square (FMOLS) estimator while utilizing the Dynamic Ordinary Least Square (DOLS) and Canonical Cointegration Regression (CCR) estimators to ensure the robustness of our results. The findings of our regression estimation indicate that rising public debt is associated with increase in natural resources extraction. This finding holds for both aggregate and disaggregated public debts. The study also finds that foreign direct investment, inflation, financial development and commodity prices drive natural resource extraction in Ghana while economic growth is found to reduce the rate of natural resource extraction in the long run. Further, we discover in this study a feedback causality between public debt and natural resources extraction. Regarding policy implications, the findings of our study suggest that strategies targeted at reducing reckless borrowing and ensure fiscal discipline would most likely reduce the excessive dependence on natural resources and ensure environmental sustainability in the long term.