External Public Debt and Economic Growth: Empirical Evidence from Bangladesh, 1974 to 2010

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ISSN-L: 2223-9553, ISSN: 2223-9944

Vol. 3, No. 2, September 2012

Academic Research International

EXTERNAL PUBLIC DEBT AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM BANGLADESH, 1974 TO 2010 Mahmud Hasan Shah Department of Economics, Jagannath University, BANGLADESH. mhs_ju@yahoo.com Shahida Pervin Department of Economics, Jagannath University, BANGLADESH. Spervinruby@yahoo.com

ABSTRACT
This research paper investigates the relevance of the dependence of Bangladesh economy on external public debt. Using some econometric tools, the study is conducted to find out the effect of external public debt on economic growth from the perspective of Bangladesh economy for the period 1974 - 2010. The study will probe debt overhang and crowding out effect of external public debt to represent the effect. To specify the debt overhang and crowding out effect of external public debt, the debt burden has been segmented into two part; external debt stock and external debt service. Long run significant negative effect of external public debt service and positive effect of external public debt stock on GDP growth have been found from this investigation. In short run, only external debt service has negative effect but the debt stock does not have any significant effect. Thus the investigation did not find any evidence of debt overhang provided that there is no significant adverse effect of debt stock on GDP growth. But crowding out effect was originated from the fact that there is evidence of adverse effect of debt service payment on economic growth for the period. As more debt stock means more service payment, the study shows a dichotomy in obtained results. So the reconciliation of debt should be prudent to optimize the growth of Bangladesh. Short run disequilibrium in the path of long run is corrected at a good speed. Keywords: Crowding out effect, cointegration, debt overhang, external public debt, error correction mechanism.

INTRODUCTION It is a contentious issue whether external public debt stimulates or retards economic growth. Some researchers found positive, some negative and some found no significance between the relationship of external debt and economic growth for different economic condition. External debt is the total public and private debt owed to nonresidents repayable in foreign currency, goods, or service. In Bangladesh external debt to GDP ratio fluctuates from 6.94 to 45.41 between the periods 1975 to 2010. In FY 2010-11, per capita debt burden stood at USD 163 that is 22.99 percent of per capita GDP. Out of total debt, external debt was 149.99. This large share of external public debt needs a large amount of debt service in interest payment and repayment of principal. Debt service ratio reduced to 2.95 in 2010 from 8.8 in 1980, 10.9 in 1990 and 7.2 in 2000 as the ratio of export earnings. Bangladesh`s total external public debt has been reduced from 527 percent of government revenues in 1993 to 267 percent of government revenues in 2006. Total debt service payment is nearly 100 percent of government revenues in Bangladesh. If the rate of return from debt is higher than the service payment rate, it might be beneficial for the country and vice versa. High current stock of external debt may acts as future increasing tax to serve debt. Debt may also affect the growth through crowding out. These include all factors through which debt financed fiscal policy adversely affect economic growth i.e., growth is restrained by the lack of available investment resource. This research will investigate how the high stock of debt and service payment affects the economy.

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Part-III: Social Sciences & Hunanities

ISSN-L: 2223-9553, ISSN: 2223-9944 Vol. 3, No. 2, September 2012

REVIEW OF THE RELATED LITERATURE Most of the studies found that debt interrupt GDP through debt overhang i.e., reducing and crowding out investment. Some found...
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