Household Debt Servicing and Multidimensional Poverty in Ghana

This study investigates the effect of household debt servicing on multidimensional poverty in Ghana using data from the Ghana Living Standards Survey (GLSS7). The objectives were to examine the effect of debt servicing, explore heterogeneity across gender and location of household heads, and identify a threshold beyond which debt servicing become welfare-reducing. Using IV-GMM, quantile regression, and threshold models, the results consistently show that debt servicing exacerbates multidimensional poverty. The IV-GMM estimates indicate that a 1% increase in debt servicing raises multidimensional poverty by 0.00113 points. This reveals that households would require 11.26% increase in income (GH6,210) to offset this effect. Male-headed and rural households face stronger adverse impacts than female-headed and urban households, while quantile regressions show that the poorest households bear the greatest burden. Threshold analysis identifies 23% of net income as a critical tipping point: below it, debt servicing reduces poverty, but above it, a 1% increase in debt servicing raises poverty by 0.0959 points. This suggests that offsetting this threshold effect would require 959% income increase (GH574,243). We therefore recommend that the Ministry of Finance should strengthen financial inclusion initiatives with safeguards that prevent over-indebtedness, particularly among vulnerable households.