Estimating Optimum Growth-Maximizing Public Debt Threshold for Nepal

Abstract

One of the common agenda of underdeveloped economies is to achieve a high and sustainable level of economic growth in the long run. Domestic and external borrowings are playing a crucial role in fulfilling the resource gap in the context of Nepal for a long period. A growing number of recent studies support the idea of a debt threshold level (turning point) above which debt starts reducing economic growth. This paper empirically investigates the relationship between economic growth and several other factors (investment, trade openness, population growth, domestic savings, and government debt) in the context of Nepal. The debt-growth relationship has been estimated by regression analysis and further explored the non-linear relationship between public debt and economic growth using time series annual data for the period of 1976-2019. The ARDL bound technique has been applied to estimate the short-run and the long run impact of debt on economic growth. Moreover, a quadratic bivariate model based on ARDL coefficients has been estimated to identify the growth maximizing level of debt. The estimated parameters confirm the optimum public debt to GDP ratio in the context of Nepal is 33 per cent. The policy implication of this finding for the Government of Nepal (GoN) is to ensure public debt management in line with the growth maximizing debt threshold. Further, a high level of trade deficits and government effectiveness in public sector management squeezes the fiscal space in utilizing adequate public debt in Nepal.

The Analysis of Debt-Threshold: Empirical Evidence from Pakistan

“…This figure also illustrates that, first, the debt curve for this bivariate quadratic function (i.e., equation 4) is strictly concave or inverted U-shape curve which shows an inverse relationship of growth with debt and, second, that the resulted value (i.e., 48.42 percent of GDP) is an optimum value of debtthreshold beyond which a slight increase in debt acquisition will disrupt the whole growth process and will lead to foster adverse effects on the economy. Further, these estimates are similar to the conclusion made by Nguyen et al(2003), Mupunga and Roux (2015), Baharumshah et al (2016), Tran (2018, Khanfir (2019), Zaghdoudi (2019), and Bhatta and Mishra (2020). These results also highlight the need of special policy intervention from the central government for keeping the magnitude of debt below the debt threshold.…”

“…Khanfir (2019) and Zaghoudi (2019) stressed on fiscal consolidation and dragging the debt burden below the debt threshold towards stimulating economic growth. Ndoricimpa (2020) and Bhatta and Mishra (2020) focused on accelerating the economic growth and reducing the negative impact of debt which was found drastic in debt-abundant countries as compared to debtmoderate economies. With regards to the application of this theory in Pakistan, we have come across only a few papers that have examined the theories and concepts of this inverse relationship and have concluded that this relationship exists in the form of an inverted-U shape curve.…”

Estimating the Optimum Level of Debt-Threshold: Empirical Evidence from Pakistan

“…Minhaj-ud-Din, Azam & Tariq (2020) concluded that excessive accumulation of external debt is inimical and curse for public investment and economic productivity. Bhatta and Mishra (2020) estimated that optimal debt should not exceed 33% of GDP which is mandatory for accelerating the economic growth of Nepal. Table 1 represents a brief sketch of the empirical work held on this topic.…”

“…Step 5: Estimating the optimum level of debt-threshold by using the quadratic bivariate model based on the long-run coefficients of the ARDL model listed in Table 6 (Bhatta & Mishra, 2020). Mathematically:…”

“…al. (2016), Tran (2018), Khanfir (2019), Zaghdoudi (2019), and Bhatta and Mishra (2020) who found that debt accumulation should be made at moderate level of GDP. However, our findings are different from that of Chudik et.…”