Open AccessCan Pakistan Raise More External Debt? A Fiscal Reaction Approach
Author(s) -
Sadia Mansoor,
Aqeel Baig,
Irfan Lal
Publication year - 2020
Publication title -
business and economic review
Language(s) - English
Resource type - Journals
eISSN - 2519-1233
pISSN - 2074-1693
DOI - 10.22547/ber/12.4.2
Subject(s) - external debt , economics , debt , debt to gdp ratio , internal debt , debt ratio , monetary economics , debt levels and flows , fiscal policy , fiscal sustainability , sustainability , index (typography) , macroeconomics , ecology , biology , world wide web , computer science
This study has assessed the role of existing policies in determining the state of debt sustainability for the Pakistan economy (1980- June 2019) through fiscal reaction function. This study adds to the literature in two aspects. First, a policy index has been constructed to formulate a debt-policy interactive term that implies whether or not existing macroeconomic policies contribute in making external debt sustainable in Pakistan. Second, this study has gauged the potential sustainable external debt through in-sample forecast method. The estimated results obtained by the ARDL method show that Pakistan has just entered into a phase of unsustainable debt burden in the long run as fiscal reaction analysis exhibits the weak significant negative relationship between primary balance and external debt to GDP ratio. Moreover, existing macroeconomic policies also show a negative association with the primary balance that implies the ineffectiveness of policies in making external debt sustainable for Pakistan. This study suggests that an increase in foreign inflows through remittances or export earnings may improve the debt sustainability state in Pakistan.