Long Run Effect of Public Debt on Economic Growth In Sri Lanka

Transcription

1 IOSR Joural of Busiess ad Maagemet (IOSR-JBM) e-issn: X, p-issn: PP Log Ru Effect of Public Debt o Ecoomic Growth I Sri Laka A. M. C. P. Attapattu, H.M.N Padmasiri Departmet of Busiess Ecoomics, Uiversity of Colombo, Sri Laka Abstract: Sri Laka is relyig heavily o public debt to fiace the budget deficit sice its idepedece from British i Thus, it is much importat to ivestigate the log ru of public debt o ecoomic growth of the coutry for the period 1977 to 2012 usig time series data.sri Laka itroduced fully liberalized ecoomic policy i The study used domestic debt, exteral debt ad educatioal expediture as explaatory variables to determie their effect o GDP i the log ru. Log ru is estimated by employigauto Regressive Distributed Lag (ARDL. The coefficiet of Error Correctio Term (ECT suggests disequilibrium that is corrected at the speed of 52.8 percet over each year. Sigificat ECT is a proof of the existece of log ru relatioship. Keywords: Exteral debt, Domestic debt, log ru effect I. Itroductio Govermet eeds to borrow for two broad categories; macroecoomic purposes such as higher ivestmet, higher cosumptio (educatio ad health or to fiace trasitory balace of paymets deficits [to lower omial iterest rates abroad, lack of domestic log-term credit, or to circumvet hard budget costraits] (Soludo, 2003). But it has bee observed sice 1900; most of the couties i both advaced ad emergig categories accumulate debt/borrowigs maily for the purpose of fiacig budget deficits. Situatios where advaced ecoomies also happeed to deped o the borrowigs because of large stock of defese expediture spet o for world war period i early 20 th cetury ad to withstad for adverse effects of such as the Oil prices crisis ad debt crisis occurred i However, for those less debt burdeed atios associatio of debt seemed to have higher growth rates where emergig coutries ad less developed coutries kept accumulatig debt for promotig ecoomic growth due to their limited capacity to promote ecoomic growth ad to bridge budget deficits. Govermets prefer accumulatio of debt i fiacig budget deficits because it is a ati-iflatioary mechaism ulike pritig moey or imposig taxes. Although govermet ca use taxes to fiace its budget deficit, taxes ted to distort the structure of relative prices, ad borrowig, if pushed beyod the carryig capacity of the ecoomy, create problems of itergeeratioal equity (Akram, 2011). Ay attempts to reduce the deficit by raisig taxes to itolerable levels or cuttig dow o capital expediture are ill-advised as they oly jeopardize future growth prospects of the ecoomy (Foseka&Raasighe, 2007) Therefore, it seems that govermet usig of both the strategies simultaeously. Havig accumulated public debt for a loger period ad cosiderable proportio of foreig capital iflows (export icome ad ew credit facilities used to service debt aually, it is importat to ask how public debt may ifluece ecoomic growth because policy makers eed to be aware of the relatioship betwee these whe formulatig ad implemetig macroecoomic policies. As the importace of the study, debt is improvig welfare ad ehacig growth at moderate level but there is damage from high level of debt (Stephe et.al., 2011). They further say that there is a threshold for debt as a proportio of GDP ad the govermet should keep well below this level ad otherwise it will badly ifluece o ecoomic growth. Accordigly, this paper is importat for decisio makig to address fiscal problems. II. Research Issue Priorliterature has show a mixed impact of public debt o ecoomic growth. Importat poit is accordig to the cotext those studies are carried out the results are varied thus there is o commo agreemet. A differet political partiesgoverig sice the idepedece have bee usig debt fiace to meet budget deficits. Fiacig budget deficit through sources such as pritig moey, icreasig taxes ad cuttig dow govermet expediture lead to icrease price level of the coutry which may result i deterioratig livig stadards of the people (Foseka&Raasighe, 2007), therefore i order to balace these adverse effects come through various sources public debt seemed to be playig a sigificat role i fiacig fiscal deficit i Sri Laka. As poited out by Pathberiya ad Wijeweera (2005) reasos for greater accumulatio of exteral debt 66 Page

2 Log Ru Effect Of Public Debt O Ecoomic Growth I Sri Laka are; ivestmet projects udertake by the govermet o the areas such as power ad eergy, irrigatio ad agriculture ad greater depreciatio experieced by Sri Laka rupee agaist major currecies. These researchers have paid attetio i relatio to budget fiacig ad the courses for borrowig debt. However, there is a doubt that whether public debt have a sigificat literature review impact o ecoomic growth i Sri Laka. Accordigly, researcher has take this situatio the gap as a research issue i the study. III. Empirical Evidece Towards Impact Of Public Debt O Ecoomic Growth Positive effects of public debt relate to the fact that i resource-starved ecoomies debt fiacig if doe properly leads to higher growth ad adds to their capacity to service ad repay exteral ad iteral debt (Akram, 2011). Chowdhury (2001) stated that as far as the relatioship of public exteral debt of a ecoomy ad ecoomic growth is cocered, a reasoable level of borrowig is likely to ehace ecoomic growth through capital accumulatio ad productivity growth. [As cited i Akram, (2010) Burside (2000) poited out at the iitial phase of developmet coutries have small capital stocks ad the ivestmet opportuities are also limited, therefore exteral borrowigs for productive ivestmet provide macroecoomic stability. Paudel ad Perera (2009) highlighted that foreig debt i developig coutries ca be used to acquire techology ad other factors of productio to icrease employmet opportuities ad atioal productivity. Egbetude (2012) poit out public debt ad ecoomic growth are positively related if the govermet is sicere with the loa obtaied ad use it for the developmet of the coutry rather tha chael the fuds to their persoal iterests. I cotrast Shah ad Pervi (2012) remarked if the rate of retur from public debt is higher tha the debt service paymet rate, it has greater possibility of affectig positively o ecoomy ad vice versa. Barik (2012) i cotrast to direct relatioship of public debt ad ecoomic growth empirically examied idirect ifluece of public debt o ecoomic growth through its impact o ivestmet i Idia for the period of ad regressio results idicated that public debt positively affects ecoomic growth; oe percet poit icrease i debt is associated with a icrease i real GDP of aroud 0.08 percetage poit per year. Based o the results cocludes that govermet debt has made a sigificat cotributio to the ecoomic growth ot oly directly but also idirectly via ivestmet ad hece debts have positive effects i developig ecoomies because of that fuds are allocated for ivestmet purposes. As per debt guide (2013); debt liabilities owed by residets to residets of same ecoomy are domestic debt. Reihart, Rogoff, ad Savastao (2003) state all debt liabilities of a govermet that are issued uder ad subject to- atioal jurisdictio, regardless of the atioality of the of the creditor where terms of the debt cotracts may be market determiate or set uilaterally by the govermet. Debt guide (2013); debt liabilities owed by residets to oresidets are exteral debt. Reihart, et al., (2003) defie exteral debt as total liabilities of a coutry with foreig creditors both public ad private. Creditors ofte determie all the terms of the debt cotracts, which are ormally subject to the jurisdictio of the foreig creditors or, for multilateral credits, to iteratioal law. Shah ad Pervi (2012) describe exteral debt as the total public ad private debt owed to oresidets repayable i foreig currecy, goods or service. I most literature evidece public debt is classified as sum of exteral debt ad domestic debt (Akram 2011, Barik 2012). Total debt liabilities of a govermet with both domestic ad foreig creditors where govermet ormally comprises the cetral admiistratio, provicial ad local govermets, ad all the etities that borrow with a explicit govermet guaratee are defied as total public debt (Reihart, et al., 2003). Basically budget deficits are fiaced by; pritig moey, foreig borrowigs, domestic borrowigs ad ruig dow foreig exchage reserves (Akhtar& Hassa, 2012). I this ature (where public debt works i lie with the budget deficits Efthimiadis ad Tsitzos (2012)highlighted that public debt ad ecoomic growth gaied much attetio over the recet decades as may coutries have experieced lastig budget deficits which lead to sharp icreases i Debt-to-GDP ratios, ad for may, a large share of exteral debt. IV. Methodology Uit Root Test Whe coductig time series studies prior literature has obliged to check uivariate time series of variable by usig a uit root test i each series before estimatig ay equatio. It is cosidered as a problem if there is a uit root because particular series cosidered beig o-statioary. No-statioary variables may lead to spurious results which produce high R 2 value ad t statistics, but without ay coheret ecoomic meaig.i order to perform the uit root test, this study has adopted the Augmeted Dickey-Fuller (ADF test of checkig uit root because ADF uit root testig procedure is well established i the literature. The results are aalyzed whether the variables are statioary at level or at 1st differece I (1 at 5 per cet sigificace level). 67 Page

3 Log Ru Effect Of Public Debt O Ecoomic Growth I Sri Laka 4.2 Lag Legth Criterio The study expects to use Vector Auto Regressive (VAR) Lag Order Selectio Criteria to select the optimal lag legth. Uder that, usig Akaike iformatio criterio (AIC, Schwarz iformatio criterio (SIC), Haa-Qui iformatio criterio (HQ), Sequetial modified LR test statistic (LR) lag legth adfial predictio error (FPE) are selected. The lag legth provided by most of the iformatio criterio is utilized i the study. 4.3 Auto regressive Distributed Lag The coefficiet value of the ECT provides iformatio to idetify the rate at which the disequilibrium is corrected i.e. speed of adjustmet towards the log ru equilibrium after a short ru shock. If the variables are statioary at level or first differece, the ARDL model ca be applied. Followig models have bee used i the study. lgdp t = β 0 + lgdp t = β 0 + β 1i lgdp t i + β 2i DD t i + β 3i ED t i + + α 2 DD t 1 + α 3 ED t 1 + α 4 EDU t 1 + ε t Eq (1 β 1i lgdp t i + β 2i DD t i + β 3i ED t i + β 4i EDU t i + α 1 GDP t 1 β 4i EDU t i + EC t 1 + ε t Eq (2 Where, - GDP t :Natural logarithm of Per capita GDP - DD: Domestic Debt as a percetage of GDP - ED : Exteral Debt as a percetage of GDP - EDU : (Proxy variable for huma capital Aual educatio expediture - ε t : Radom error term - EC: Error correctio term Researcher applied Eq (1) to determie the joit associatio of GDP, DD, ED ad EDU. The Eq (2) is the ARDL that has bee applied to determie the log ru effect or the log ru equilibrium. V. Data Presetatio Ad Aalysis 5.1. Source of the data Mai source of the debt data are obtaied from the publicatios of Public Debt Departmet of Cetral Bak of Sri Laka (CBSL). The reliability of the publicatio Public Debt Departmet i Sri Laka, Performace i 2012 ad Strategies for 2013 ad beyod for debt data is high because CBSL remais the resposibility of maagig public debt i Sri Laka uder the Moetary Law Act No. 58 of Educatio Expediture (proxy variable for Huma Capital is acquired from the publicatios of Cesus ad Statistic Departmet of Sri Laka. Researcher used aual data i the study Result for Uit Root Test Table: 1 Uit root test results Variables At level At first differece GDP *** DD *** ED *** Edu ** Note: *** ad** idicate statistically sigificat at 1% level ad 5% level respectively Augmeted Dickey Fuller (ADF) uit root aalysis has bee applied to test the statioary of data. Probabilities at level are isigificat ad the variables are o-statioary. They are statioary at first differece as the P values are sigificat. Therefore, all the variables are oe statioary at level ad statioary at first differece. These results idicate that they are I (1 variables). Accordigly; ARDL model ca be applied to determie the log ru effect. Graphical presetatios of data are provided by figure 1 ad they are havig tred. 68 Page

4 Log Ru Effect Of Public Debt O Ecoomic Growth I Sri Laka DD ED EDU GDP 160, , , , Figure: 1 Lie graphs of the data 5.3. Optimal Lag Legth Selectio Table: 2 Iformatio criteria results VAR Lag Order Selectio Criteria Edogeous variables: GDP DD ED EDU Lag LogL LR FPE AIC SC HQ NA * * * * * Note: * idicatesthe umber of lag legth Accordig to the Schwarz iformatio criterio (SC), ad Haaqui iformatio criterio (HQ), there is oe lag legth. Akaike iformatio criterio (AIC, Fial predictio error (FPE ad Sequetial modified LR test statistics (LR) represet three lag legths. As may criteria recommed three lag legths, researcher applied three i restricted VAR Joit associatio Table: 3 Wald coefficiet restrictio test Test Statistic Value df Probability F-statistic (4, Chi-square Probability of Chi-Square is ad sigificat at 5%. This idicates that there is a joit associatio amog GDP, ED, DD ad EDU. Therefore, ARDL model has bee costructed to determie the log ru effect o ecoomic growth. Result is give by table Page

5 5.5. Results of Auto Regressive Distributed Lag (ARDL Table: 4 ARDL regressio results Depedet Variable: D(GDP Log Ru Effect Of Public Debt O Ecoomic Growth I Sri Laka Variable Coefficiet Std. Error t-statistic Prob. C D(GDP( ** D(GDP( D(GDP( * D(ED( D(ED( *** D(ED( D(DD( D(DD( D(DD( D(EDU( E-06* 1.72E D(EDU( E E D(EDU( E E ECT( *** R-squared Mea depedet var Adjusted R-squared S.D. depedet var S.E. of regressio Akaike ifo criterio Sum squared resid Schwarz criterio Log likelihood Haa-Qui criter F-statistic Durbi-Watso stat Prob(F-statistic Note: ***, ** ad* idicate statistically sigificat at 1% level, 5% level ad 10% level respectively Probability of error correctio term that is with egative beta of ad it is sigificat at 1% level. This idicates that there is a log ru associatio betwee GDP ad public debt. Whe there is a shock i the previous year, 52.8% of disequilibrium is adjusted i the curret year to the log ru equilibrium. Other coefficiets represet the short ru impact of lagged periods. I the short ru oe period lagged of GDP has a sigificat effect o ecoomic growth. Three period lagged of GDP has a margial effect o ecoomic growth i the short ru.two periods lagged of exteral debt is sigificat at 1% ad there is a short ru egative impact o ecoomic growth. Oe period lagged of educatio has a positive impact o ecoomic growth at 10% Diagostic tests Table: 5 Heteroscedasticity test results Heteroskedasticity Test: Breusch-Paga-Godfrey F-statistic Prob. F(13, Obs*R-squared Prob. Chi-Square( Scaled explaied SS Prob. Chi-Square( Probability of observed R-squared is 0.58 ad the result is isigificat. This says that variace of residual is costat ad the model is ot havig heteroscedasticity problem. Therefore, model is appropriate. Table: 6 Serial correlatio test results Autocorrelatio Partial Correlatio AC PAC Q-Stat Prob. *.. * *.. * Page

6 Log Ru Effect Of Public Debt O Ecoomic Growth I Sri Laka. *.. * *.. * *.. * **..** Correlogram Q statistics idicate that all the probabilities are isigificat ad o serial correlatio or auto correlatio i the residuals. Therefore, the model is appropriate ad results are valid Series: Residuals Sample Observatios 32 Mea -1.59e-17 Media Maximum Miimum Std. Dev Skewess Kurtosis Jarque-Bera Probability Figure: 3 Probability of Jarque-Bera test statistics is ad result is isigificat. This idicates that residuals are ormally distributed with zero mea ad the regressio model is highly valid CUSUM 5% Sigificace Figure: 4 71 Page

7 Log Ru Effect Of Public Debt O Ecoomic Growth I Sri Laka I the figure 4, lie of cumulative sum of recursive residuals is betwee the two borders lie ad parameters are stabilized. Accordigly, there are appropriate results of the ARDL. VI. Coclusio This study examies the impact of public debt o ecoomic growth i Sri Laka over the period of 1977 to Public debt is classified as public domestic debt ad public exteral debt ad their impacts towards ecoomic growth i log ru. For this purpose, the study adapted Auto Regressive Distributed Lag model.fially, Error Correctio Term was used to capture the speed of adjustmet. I addressig research objective, the study fids domestic debt, exteral debt ad educatioal expediture sigificatly affect ecoomic growth i log ru. As the policy implicatio, the results of the study are providig strategic iformatio for the govermet i makig policy decisios with regard to borrowig debt. The govermet of Sri Laka eeds to pay attetioto the fiacig budget deficit by properly maitaiig the threshold for debt as a proportio of GDP. Foreig ad domestic borrowigs will ifluece o ecoomic growth i the log ru but threshold for debt is a factor to be evaluated i fiacial decisios.public debt ad ecoomic growth gaied must be paid attetio over the time i budgetary decisio makig. This is vital to lead a appropriate Debt-to-GDP ratio;otherwise debt will drag ecoomic growth egatively. From the policy prospective it is recommeded to refrai from adverse effects of exteral debt ad public domestic debt o ecoomic growth. The egative effect o ecoomic growth is more severe. As foreig exchage reserves are very importat for payig back exteral debt the reveue geerated from export ca help Sri Laka to overcome the issue. Therefore, export diversificatio strategies ad value added export must be strogly promoted. Also good relatios with other coutries to reduce trade barriers must be ecouraged. At the same time value of Sri Laka Rupee i foreig exchage market should be protected because currecy devaluatio strategy to ehace exports has ot bee helpful agaist competitive devaluatios. As exteral ad domestic debt have egative impact o GDP, policy makers heavy reliace of debt to fiace fiscal deficit must be discouraged because there is dire eed to stimulate reveue. Refereces [1] Akhtar, T & Hassa, H 2012, 'Public Debt Burde ad Ecoomic Growth of Bagladesh', A VAR Approach.', vol.1, o.10. [2] Akram, N 2011,'Impact of Public Debt o the Ecoomic Growth of Pakista'.The Pakista Developmet Review, vol.50, o.4, pp [3] Ali R, & Mustafa, U 2011,'Exteral debt accumulatio ad its impact o ecoomic growth i pakista, Eergy Security ad Ecoomic Sustaiability'.Islamabad: Pakista Society of Developmet Ecoomics. [4] Atique, R., & Malik, K 'Impact of Domestic ad Exteral Debt o the Ecoomic Growth of Pakista'. World Applied Sciece Joural, pp [5] Barik A. 2012,Govermet Debt ad Ecoomic Growth i Idia. 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