Relationship between mineral revenue and economic growth in Ghana: a time series analysis

Abstract

Mineral revenue is an important revenue source for the Government of Ghana. Policies and investment strategies initiated by government over years, have madesignificant contributions towards Ghana’s economic albeit concerns of Ghana not gaining much from mineral revenue in over a century. The aim of this study was to ascertain the impact of mineral revenue on Ghana’s economic growth by specifically, investigating the long-run relationship between Mineral Revenue (MR), Government Expenditure (GE), Foreign Direct Investment and Economic Growth (RGDP) in Ghana. The research employed the Vector Error Correction Model, Granger-Causality, Variance Decomposition in VAR to analyze the time series data. The data were generated from the Minerals Commission, Bank of Ghana, Ghana Chamber of Mines, World Development Indicators among others covering the period 1990 to 2019. Variables were found to be stationary at first difference after failing at levels. Subsequently, the cointegration results indicated that there was at least one cointegrating equation, which indicated the existence of a long-run economic relationship between the variables in the system. The long-run analysis showed that mineral revenue has a positive relationship with economic growth (proxied as Real GDP) where FDI and GE negatively related with RGDP. The negative relationship between GE and RGDP confirmed findings from previous studies that, government expenditure in Ghana is not directed at critical sectors which can deliver the proportional economic growth. Findings of the study proved that, mineral revenue is a key contributor to Ghana’s GDP and any shock to Ghana’s Mining Industry is likely to cause a significant shock to the economy. The study recommended among others that, policymakers should formulate policies that will attract both local and international investors into the mining industry to enhance its contribution to the general economy.