Implication of Oil Price Fluctuations on GDP Growth in Ghana

Abstract

This study investigates the connection between Ghana's GDP growth and the varying oil price. The paper used annual secondary data from the WDI and U.S. Energy Commission databases, spanning 1980-2020, because of availability of data for the chosen variables. Data analysis was done using VEC model. Results of the VECM show that Oil price has a positive effect on GDP growth in the short-run but a negative effect in the long-run. The results further indicates that if there is a shock in oil price in the short-run 197.70% of the short-run disequilibrium will be re-adjusted to equilibrium in the long run, 7.74% of inflation, 75.60% of GFCF, 10.20% of trade, 148.35% of consumption and 83.83% of exchange rate will be re-adjusted to the long-run equilibrium.  Further, the granger test shows that oil price granger cause GDP growth and has unidirectional relationship. It was therefore concluded that an increase in oil price leads to a decline in the economy, hence a negative relationship between oil price fluctuation and GDP growth. Based on the findings, we recommend that the Government of Ghana should implement tight monetary policies to manage the inflationary pressures, hedging, or diversify into non-petroleum sources of energy such as solar to reduce high dependence on oil.