Fiscal Performance and External Public Debt Sustainability: A Case Study of Pakistan

Abstract

The present study analyzes the impact of fiscal performance on external debt sustainability for Pakistan using the time series data for the period 1976 to 2013. The objective of the study is to find out whether fiscal performance, segregated into tax revenue, non-tax revenue and government expenditures, strengthens or weakens the external debt sustainability indicators.  To find the long run relation among the variables, Johansen Co-integration technique is applied. Vector Error Correction Model and parameter stability tests are also applied to examine the short-run relationship. The empirical results from this study show that enhancing the pool of government resource through tax revenue, non-tax revenue, and worker’s remittances reduces the debt burden and contributes towards debt sustainability. On the other hand, increase in the total government expenditures flames the fire of debt burden and weaken the debt sustainability condition. The VECM and CUSUM test shows that parameters remain stable during the period of study. In the view of empirical findings, the study recommends that fiscal consolidation is required for improvement in external debt sustainability.

Keywords: external debt sustainability, debt carrying capacity, fiscal performance