To Borrow Or Not: Empirical Evidence From Public Debt Sustainability Of Pakistan
Author: Wajid Islam

Public debt sustainability; the ability of any country to repay its interest and principal public debt without turning to any external rescue. It has become a corner stone for economic stability of any indebted country. The key factors that are causing burgeoning public debts are high deficits like; fiscal, current account and primary deficits besides low economic growth, that is unable to fill such deficit gap. Reducing the level of public debt to 60 percent of GDP and fiscal deficit below 4 percent are the main objectives of FRDL 2005 act. However, this aforementioned limit is breached every fiscal year in the form of high fiscal deficit and whopping public debt to GDP ratio, i.e. 87.6 percent in 2020 alone. This study seeks to examine the pathway where we may bring the public debt level within the limits drawn by FRDL along with the evaluation of public debt sustainability. It uses the annual data of public debt, primary balance, output growth, external debt and current account balance in addition to some dummies. Debt sustainability analysis (DSA) is forecasted till 2030 and it is found that at 10 percent growth rate, public debt level can be brought under 60 percent by 2030. Furthermore, the study has also estimated the Fiscal Reaction Function for the period of 1978 to 2020 to evaluate the sustainability of public debt along with external debt. The function is estimated using time series data and instrumental variable technique to counter the potential endogeneity. The study found that public debt of the country is in a sustainable range. However, if the current trend remains the same, the country will not be able to bear such hefty load of ballooning debt, as indicated by the threshold of DSF. The findings suggest that policies should be designed to enhance the growth rate of GDP by providing suitable environment to investors and FDI. Furthermore, all kind of deficits must be lessened to stabilize the macro economy and stringent reforms should be implemented. Supervisor:- Dr. Junaid Ahmad

Meta Data

Supervisor: Junaid Ahmed

Related Thesis​