ABSTRACT

The public debt to GDP ratio has undergone substantial fluctuations over both the short and long run. The global debt-to-GDP ratio rose to 100% during the 2020 COVID-19 pandemic, retracting substantially by 2022. Thus, this paper analyzes the drivers of public debt dynamics in Pakistan using macroeconomic data from 1980Q1 to 2023Q4 through the Bayesian Structural Vector Auto- regression (SVAR) model, identified via sign and the narrative restrictions. The primary objective is to quantify the contribution of the identified shocks to fluctuations in the debt-to-GDP ratio and to explore their short- to medium-term macroeconomic effects. The impulse responses reveal that demand shocks accounting for (-4.69 PP) lead to short-term economic expansion but ultimately increase the debt ratio due to external imbalances and fiscal pro-cyclicality. The positive supply shock (5.50), in contrast, reduces the debt by fostering output without the proportionate fiscal expansion, aligning with Pakistan’s productivity-driven growth episodes. Moreover, the primary balance shocks (7.52) demonstrate immediate debt-reducing effects with minimal adverse impact on GDP, especially when narrative restrictions are incorporated to isolate the exogenous episodes.