Granger Causality Analysis on Ghana’s Macro-Economic Performance and Oil Price Fluctuations

Abstract

Oil has had an exclusive position in the world’s economic system. It is an essential source of energy, an irreplaceable transport fuel, and a vital raw material in many manufacturing processes. Despite the incredible role oil plays in socio-economic development and most industrial activity, studies on oil price-economy relationship seems to have received little attention from the perspective of developing economies. Although a colossal volume of literature exist on oil prices effects on economic performance, majority of these studies are concentrated on rather developed markets. As Ghana continues her quest to grow into a middle-class economy, it is imperative to secure a reliable supply of energy largely from imports, which is vital for fueling economic growth and development. Consequently, guaranteeing the supply of this all-important resource brings verification of the interconnection between oil price fluctuations in the global market and Ghana macroeconomic performance. Considering the fact that most developing economies are oil dependent for economic growth and industrial productivity, a formal studies on oil price fluctuations and Ghana economy will better position policy makers in taking energy policy issues to address impacts of oil price fluctuations. Against this backdrop, we employ an empirical modelling technique using Granger Causality test to investigate the direction of causation between oil price fluctuations and the Ghanaian economy. The empirical findings of this study suggest that oil price variations have adverse impact on Ghana’s macroeconomic performance. We also observe that a uni-directional causality runs from oil price fluctuations to output and economic growth in Ghana. Thus, we recommend that policy action be formulated to expand and refurbish the nation’s refinery hub, thereby allowing for home production of finished crude oil products which drains the nation’s budget during periods of oil price spikes.

Keywords: Oil price, Ghana, Granger Causality, Macroeconomy.