The linkage between banking crisis and sovereign debt crisis: Evidence from Ghana

This study investigates the effect of the recent Ghanaian banking crisis on the country’s ongoing sovereign debt crisis. An Autoregressive Distributed Lag Model (ARDL) is adopted to estimate the immediate effects of Ghana’s banking crisis on public debt levels using secondary data spanning the period of 1997–2022. The results show that causality flows from banking crisis to sovereign debt and not vice versa. The banking crisis has a positive significant effect on Ghana’s sovereign debt levels. It also shows a significant negative relationship between Real GDP growth and public debt levels while private sector credit, and currency depreciation have a significant positive relationship with public debt levels in both the short run and long run. This study contributes to the doom loop literature by offering empirical and theoretical evidence of the linkage between banking crisis and sovereign debt crisis in a frontier economy. The study recommends promoting export diversification, strengthening financial sector regulations, enhancing institutional frameworks, and implementing effective debt management strategies to ensure economic stability.