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.
