Abstract:
The study examines the effect of capital inflow variables on financial
development in Ghana. Annual data on foreign direct investment and external
debt was extracted from the World Bank World Development Indicators from
1970 to 2014 while data on domestic access to credit by the private sector and
remittance inflows was extracted from the Global Financial Development
Dataset from 1970 to 2014. Data was analysed by using the descriptive, causal
and the Johansen and Juselius (1990) multivariate cointegration model. The
results revealed that foreign direct investment; external debt and remittance
inflows have a significant negative relationship with financial development in
the long run. Also, the study documents a significant negative relationship
between external debt, remittance inflows and financial development in the
short run. However, the study recorded an insignificant relationship between
foreign direct investment and financial development in the short run. For
foreign direct investment to fully contribute to financial development, issues
of capital flight must be addressed by government. Government must adopt
policies that are expected to reduce the debt burden and ensure that external
debt did not reach unsustainable level. Policy makers should take pragmatic
steps to channel remittances inflows to productive sectors of the economy.
Finally, government should make policies that will make foreign capital
inflows complement but not to replace domestic investment.
