As the Ghanaian economy positions itself on the path to move the economy from stability to growth, policy makers and international community as a whole have been concerned with identifying the drivers of growth and whether these sources of growth would lead to the sustainable growth needed.
Right from the days of Structural Adjustment Programme (SAP) till now, Ghana has benefited immensely from significant capital inflows, mostly in the form of donor assistance. More recently, Ghana has also identified another form of inflow, remittances, as a significant component of the current accounts.
While these developments have been seen as crucial to the current trend of stability, people have questioned the sustainability of this trend and how important this is in terms of promoting growth.
Over the past two decades, current account balance in Ghana has consistently been in the deficit reaching a peak of 12.5percent in 1999. However, in recent years while positive economic growth has returned in Ghana, large and increasing current account deficits have become common making the question of sustainability imperative.
On the one hand, a current account deficit is a reflection of the strength of a developing economy, insofar as it measures underlying financing of investment demand in excess of national savings. On the other hand, a current account deficit can reflect a dangerous and unsustainable imbalance between national savings and investment and the accumulation of debts.
It would be extremely important and interesting to know which of these two scenarios represent the situation in Ghana. Given the first scenario, if current account deficits in Ghana represent the underlying driver of growth, then it would reflect the major structural changes that have led to an inflow of capital causing investment and economic growth.
These in most cases have been viewed in the case of a developing country as representing the transition process from stability to growth.
The paper attempts to identify the underlying structure of current account deficits in Ghana, and specifically assess the sustainability of the Ghanaian current account using a multi faceted suite of models and indicators.
Results of the study include the following:
whereas the macroeconomic policy indicators have improved, the real sector has not responded by way of the needed growth in both tradable and non-tradable
the trade deficit driven current account deficit has been financed mainly by foreign capital inflows which in the Ghanian case has been shown to be highly volatile and pro-cyclical
this further makes the excessive deficit fragile and dependent on aid inflows
