State Borrowing and Electricity Tariff in an Emerging Economy: Post-COVID-19 Experience

As the debt stock level of Ghana continues to rise, partly due to the negative impact of COVID-19, a number of new taxes have been introduced in the 2021 budget statement alongside an upward adjustment of electricity tariff. State borrowing may significantly influence electricity tariff, as power generation and distribution are primarily undertaken by state-owned companies whose borrowing constitutes a substantial portion of the country’s overall debt. Hence, this paper assesses the impact of state debt on electricity tariff in Ghana post COVID-19. The autoregressive distributed lag (ARDL) model and error correction model (ECM) are employed to test for the Granger causality between state debt and electricity tariff. Other variables such as inflation rates, exchange rates, and net energy imports that have the propensity to influence electricity tariff are also examined. The results reveal that state debt has both short-term and long-term impacts on electricity tariff. Additionally, inflation rates, exchange rates, and net energy imports only have long-term impacts on electricity tariff. Meanwhile, exchange rates have short-term effects on state debt. The findings imply that effective debt management policies should be implemented by the government to reduce borrowing, particularly when such borrowing is not invested into projects that can repay the debt at maturity. This study demonstrates that all the accumulated debt prior to and during the COVID-19 era is causing a significant increase in Ghana’s electricity tariff. This provides an empirical clue as to what the situation is likely to be in other developing countries.