Fiscal Policy and External Imbalances in Ghana: Twin Deficits in Time of Rising Debt
Date
2026-12
Authors
Ekpeno L. Effiong
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
The recent rise in debt accumulation among SSA countries has raised concerns of a possible looming debt crisis. High debt levels often lead to higher fiscal deficits and a potential fiscal crisis, which can affect future growth prospects and external adjustment. This study seeks to investigate the role of public debt on the relationship between fiscal policy and current account for Ghana, which is confronted with a high risk of debt distress and persistent twin deficits. Allowing for nonlinearity and state-dependence in the relationship between fiscal policy and the current account, the paper finds evidence of the twin deficits phenomenon for a low-debt environment; whereas for the high-debt environment, the relationship is negative and relatively stable, though statistically insignificant, which supports the Ricardian Equivalence hypothesis. Specifically, fiscal expansion on the current account is subdued in the high-debt environment, but has a sizable and significant positive effect in the low-debt environment. Thus, fiscal consolidation along with debt restructuring may be necessary for economic recovery, ensuring both debt and current account sustainability, especially in times of high debt distress.