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Capital Flows and Current Account Sustainability: The Ghanaian Experience

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  • Maxwell Opoku-Afari
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    Abstract

    Both theoretical and operational definitions of current account sustainability show a persistent and fragile current account balance (deficit) for Ghana. This has created a financing gap in the Ghanaian economy, typically filled by capital inflows, in particular aid. Even as Ghana depends to a large extent on aid inflows it has tended to be pro-cyclical. It is evident from the analysis that current account sustainability in Ghana is very sensitive to donor flow dynamics rather than trade flows. To make Ghanaian current account deficits sustainable a more stable and predominant trade contribution is required. Remittances from abroad are of increasing importance since 2000 and are relatively stable and counter-cyclical, and if managed can contribute to current account sustainability.

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    Paper provided by University of Nottingham, CREDIT in its series Discussion Papers with number 07/07.

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    Handle: RePEc:not:notcre:07/07

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    Keywords: Current Account; Sustainability; Capital Inflows;

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    1. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
    2. Nouriel Roubini & Paul Wachtel, 1998. "Current Account Sustainability in Transition Economies," NBER Working Papers 6468, National Bureau of Economic Research, Inc.
    3. Cashin, P., 1996. "Are Australia's Current Account deficits Excessive?," Department of Economics - Working Papers Series 533, The University of Melbourne.
    4. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
    5. Giancarlo Corsetti & Nouriel Roubini, 1997. "Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies," Economics and Politics, Wiley Blackwell, vol. 9(1), pages 27-54, 03.
    6. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, World Bank Group, vol. 9(2), pages 305-33, May.
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