Bangladesh’s Public Debt Sustainability: An Empirical Analysis
Keywords:
ARDL bound testing, Bohn’s approach, Co-integration, Error correction model, Fiscal reaction function, Primary budget surplus, Public fiscal balanceAbstract
Sustainability refers to the ability of maintain a process continuously over time whereas, sustained public debt implies government competency of meeting on-going and later payment obligations without exceptional financial support. This study empirically examines whether the public (government) debt-stock of Bangladesh holds sustainability for period of 1973-2020. Searching for sustained public debt in Bangladesh has been explored using Bohn's sustainability approach. The analysis is applied through various tests namely Augmented Dickey-Fuller (ADF) unit-root test, Autoregressive Distributed Lag (ARDL) bound test, Error-correction mechanism-ECM. The result confirms the existence of co-integration as well as positive affiliation of budget surplus (negative sign with deficit & calculated as % of GDP) with 2nd lag of public debt (as share of GDP). Estimation results reveal adopted fiscal policy initiatives during the period under-report are conducive for attaining sustainable public debt in Bangladesh. The ECM co-efficient suggests 76% recovery speed from short-term shock towards long-run. The study concludes with recommending more space for fiscal expansion through investment on mega projects in economy of Bangladesh as debt level remains at comforting zone.
