An empirical investigation of determinants & sustainability of public debt in Pakistan.

Abstract

An assessment of debt dynamics and its sustainability is very important in formalizing prudent and effective macroeconomic policies especially for the economies with weak macroeconomic fundamentals and alarming debt levels. Keeping in view the recent debt escalation in Pakistan, this study aims to explore the important factors that influence the public debt dynamics in case of Pakistan and to evaluate its sustainability. This study applies the debt dynamic approach for empirical assessment of drivers of changing debt levels and analysis of public debt sustainability. Furthermore, ARDL approach is utilized to study the short- and long-run debt dynamics using historic data from 1975 to 2021. This study is distinct from already existing work on debt assessment in Pakistan as it examines both important dimensions of public debt (determinants & stability) by employing the novel dynamic debt modelling approach and using most recent data. The study finds a positive and significant impact of fiscal deficit, exchange rate depreciation and interest rate on public debt in Pakistan. The debt sustainability analysis also reveals the instability of public debt for the entire study period except for few years. The regression results corroborate with the findings from stability analysis, and the main driving forces for increasing the debt burden of the country are found to be the fiscal indiscipline along with the rising cost on account of ER depreciation and higher interest rates.