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Can Pakistan Raise More External Debt? A Fiscal Reaction Approach

Author

Listed:
  • Mansoor, Sadia
  • Baig, Aqeel
  • Lal, Irfan

Abstract

This study has assessed the role of existing policies in determining the state of debt sus-tainability 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 formu-late 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 mac-roeconomic 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

Suggested Citation

  • Mansoor, Sadia & Baig, Aqeel & Lal, Irfan, 2020. "Can Pakistan Raise More External Debt? A Fiscal Reaction Approach," MPRA Paper 106868, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106868
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    References listed on IDEAS

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    1. António Afonso & Florence Huart & João Tovar Jalles & Piotr Stanek, 2019. "Assessing the sustainability of external imbalances in the European Union," The World Economy, Wiley Blackwell, vol. 42(2), pages 320-348, February.
    2. Amber Fatima & Abdul Waheed, 2011. "Effects of Macroeconomic Uncertainty on Investment and Economic Growth: Evidence from Pakistan," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(1), pages 112-123, September.
    3. Abbas Shujaat & Wizarat Shahida, 2018. "Military Expenditure and External Debt in South Asia: A Panel Data Analysis," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 24(3), pages 1-7, September.
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    More about this item

    Keywords

    External debt sustainability; fiscal reaction function; Autoregressive distributed lag model; macroeconomic policies; primary balance;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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