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.