Impact of Public Debt Burden on Economic Growth of Bangladesh: a Var Approach

Topics: Economic growth, Statistical hypothesis testing, Time series analysis Pages: 15 (5063 words) Published: January 13, 2013
Impact of Public Debt Burden on Economic Growth of Bangladesh: A VAR Approach

Md. Hashibul Hassan
Department of Finance
Jagannath University
Dhaka, Bangladesh.

Tahmina Akhter
Department of Finance
University of Dhaka
Dhaka, Bangladesh.

Impact of Public Debt Burden on Economic Growth of Bangladesh: A VAR Approach


Bangladesh is relying heavily on public debt to meet the budget deficit since its independence. In this paper, the objective is to find out whether the government of Bangladesh is excessively borrowing from the public sources and thus negatively affecting the economy of the country. For this purpose GDP growth rate (GDP), manufacturing sector growth rate (MANF), investment as percentage of GDP (INV) and Export as percentage of GDP (EXP) have been selected for judging the impact of public debt burden (DB) on these variables. The study period is 1980-81 to 2011-12. Augmented Dickey-Fuller test has been used to diagnose whether the time series data are non-stationary. Granger Causality test has been performed to identify whether DB can be used for prediction of GDP, MANF, INV and EXP, and vice-versa. Then on the basis of the result of Johansen co-integration test, Vector Autoregressive (VAR) model has been used to find out the long term association between each set of variables. But, the result shows that in Bangladesh, there is no long term statistically significant association of DB with any of the above mentioned economic indicators. Thus, it can be said that public debt burden has no positive or negative impact on the economic growth of Bangladesh. Keywords: Public Debt Burden, Economic Growth, Domestic Debt, External Debt, Johansen Co-integration, Granger Causality JEL Classification Codes: C22, H68, R42, E62, O11

1. Introduction
Bangladesh, a young country burdened with scant natural resources and a burgeoning population, has always depended on loans and grants to fulfill its ambitions and thus deficit budgets have become the norm. Budget deficits are financed by- printing money, foreign borrowings and domestic borrowings and running down foreign exchange reserves. According to the economists and researchers, Bangladesh is using all four options mentioned above and reliance of Bangladesh government on foreign and domestic loans is crowding out private investments and thus stifling the economic growth. Excessive dependency on public debt will not only hamper the current economic growth but also will affect the economy negatively in the long run, as the future generations have to bear the burden of large amount of debt servicing. This study is aimed at drawing empirical evidence, whether heavy reliance on public debt in yearly budgets is hampering the economic growth of the country. There is much debate on the issue whether public borrowing has a positive or negative relationship with the economic growth of a country. According to the followers of classical school of thoughts of economics, public debt slows down the economic growth of a country and public debt should be kept as minimum as possible. However, the Keynesian economists are extremely flexible about public borrowing. The paper is arranged as follows - the first section introduces the study; the second section describes the current scenario and trends of budget deficit and public debt burden of Bangladesh; the findings of the related literature are reviewed in the third section; the fourth and fifth sections concern the research objective, models specification, sample size and sources of data and definitions of the related variables; the estimations and interpretations of the analyses are presented in the sixth section and the final section consists of a summary and conclusion of the study. 2. Literature Review

A large number of studies had been conducted to identify the impact of public debt burden on the economic growth of a country...
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