Munich Personal RePEc Archive

Can Pakistan Raise More External Debt? A Fiscal Reaction Approach

Mansoor, Sadia and Baig, Aqeel and Lal, Irfan (2020): Can Pakistan Raise More External Debt? A Fiscal Reaction Approach. Published in: Business & Economic Review , Vol. 12, No. 4 (1 December 2020): pp. 21-42.

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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

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