Impact of Public Debt Burden on Economic Growth of Bangladesh Essay

AbstractBangladesh is relying heavily on command debt to meet the reckon deficit since its independence. In this wallpaper, the objective is to find out whether the government of Bangladesh is too borrowing from the public sources and thus prejudicially affecting the thrift of the kingdom. For this enjoyment gross domestic product exploitation commit (GDP), manufacturing sector return rate (MANF), investment funds as percentage of GDP (INV) and Export as percentage of GDP (EXP) fix been selected for judging the reach of public debt burden (DB) on these variables. The landing field period is 1980-81 to 2011-12. Augmented Dickey-Fuller political campaign has been utilize to diagnose whether the date serial entropy ar non-stationary. granger antecedent canvas has been performed to localize whether DB can be utilise for prediction of GDP, MANF, INV and EXP, and vice-versa.Then on the alkali of the result of Johansen co-integration shield, vector Autoregres sive (VAR) pose has been used to find out the retentive term tie surrounded by each set of variables. But, the result shows that in Bangladesh, there is no long term statistically significant association ofDB with any of the above mentioned sparing indicators. Thus, it can be tell that public debt burden has no positive or negative seismic disturbance on the sparing growth of Bangladesh. Keywords Public Debt Burden, Economic Growth, home(prenominal) Debt, immaterial Debt, Johansen Co-integration, Granger Causality JEL Classification Codes C22, H68, R42, E62, O111. IntroductionBangladesh, a young country burdened with scant natural resources and a burgeoning population, has always depended on loans and grants to cope with its ambitions and thus deficit budgets have become the norm. Budget deficits are financed by- feeling money, foreign borrowings and domestic borrowings and shapening down foreign exchange reserves. jibe 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 repress the scotch growth. Excessive dependency on public debt will non 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 try 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 postulate on the issue whether public borrowing has a positive or negative relationship with the economic growth of a country. According to the pursuit 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. nevertheless, the Keynesian economists are extremely flexible roughly public borrowing. The paper is a rranged as follows the first arm introduces the test the second section describes the current scenario and trends of budget deficit and public debt burden of Bangladesh the findings of the colligate writings are reviewed in the third section the fourth and fifth sections clientele the research objective, object lessons specification, sample size and sources of information and definitions of the related variables the estimations and interpretations of the analyses are presented in the half dozenth section and the final section consists of a summary and demonstration of the study.2. Literature recapA large number of studies had been conducted to identify the bear upon of public debt burden on the economic growth of a country across the world. In Bangladesh a several number of research studies had been do on the sustainability of public debt burden and on the crowding out effect. However in Bangladesh very few studies have been done using the vector Auto-regressive model, to identify the repair of public debt burden on the economic growth of the country. Fosu (1996) investigated the debt overhang hypothesis by studying 13 severely indebted(predicate) countries- Zambia, Venezuela, Sierra Leone, Philippines, Peru, Morocco, Mexico, Kenya, Honduras, Egypt, Ivory Coast, Argentina and Algeria. The sample period was 1971 to 1991 and the author used OLS estimation method for panel data. The author found the negative and rugged relationship between investment and out-of-door debt. Qureshi & Ali (2010) testd the impact of lofty public debt burden on the economy of Pakistan.The sample of the study was 1981 to 2008. From their study a vast negative impact of public debt on the economy of Pakistan had been found by the authors. Ahmed & Shakur( 2011) performed a research to highlight the problems created by the debt ( out-of-door debt) to economic growth of Pakistan. They have used the unit blood line test and Johansen co-integration to analyze time series data from FY 1981 to FY 2008. The Granger Causality vector erroneous belief Correction (GCVEC) method proved unidirectional relationship between external debt and growth rate of GDP per capita. Wijeweera, Dollery & Pathberya (2005), investigated the connections between external debt servicing and economic growth in Srilanka during 1952-2002 by using co-integration methodology for the long run error correction method for the short run.they find negative impact of debt servicing on the economic growth but undistinguished. Theason is that the external indebtness is non too high in Srilanka.The result signify that Srilanka does non have a debt overhang problem and further they conclude that there is no short run relationshi between debt servicing and GNP. Hyman (2007) conducted a study on the impact of high debt burden on the economic growth of six Carribean countries. He found that the high indebtness of these small Carribean countries is causing negative economic growth rate. O gunmuyiwa (2011) examined whether external debt actually promotes economic growth in exploitation countries using Nigeria as a case study. Time series data from 1970-2007 were fitted into the regression equation using variouseconometric techniques such as Augmented Dickey Fuller (ADF) test, Granger causality test, Johansen co-integration test and Vector Error Correction Method (VECM). Empirical results reveal that causality does non exist between external debt and economic growth as power between debt and growth was also found to be weak and insignificant in Nigeria. El-Mahdy & Torayeh (2009) used data for the period 1981-2006 to find out the debt sustainability of Egypt and the results obtained from cointegration model revealed that the public domestic debt in Egypt has a robust negative impact on growth.The sustainability of debt was examined used some algebra methods. From a study of International monetary Fund (2008), Bangladeshs lay on the line of debt distress is low bas ed on external debt indicators. Bangladeshs external debt burden indicators do not separate the relevant policy-dependent indicative thresholds under the baseline scenario and exhibit only a marginal breach under the stress tests. Debt burden indicators are importantly worse when domestic debt is included. Accordingly, this analysis reveals a more than elevated risk of debt distress on public debt compared to results based solely on external debt. Staffs will monitor closely the evolution of domestic debt and the governments ability to mobilize domestic resources. Majumder (2007) investigated the crowding-out effect of public borrowing on private investment in the Bangladesh context. An investment function with three independent variables, namely, public borrowing, GDP and interest rate has been estimated by analyzing the unit root test, co-integration test and the error correction model.The main findings of the study do not corroborate the crowding-out hypothesis in Bangladesh, rather, provide the evidence of crowding-in effect. Gunter & Rahman (2008) used the debt task module, to project the evolution of Bangladeshs public debt over a 15-year visible horizon (from fiscal year 2006 to fiscal year 2021) under three incompatible macroeconomic scenarios and two different financing scenarios of an ambitious government-led investment strategy. The results of the debt scenario implied that sum ups in the debt levels for most of the projection period with levels high enough to have negative implications on investment and growth, the grant scenario implies a clearly limited increase in debt levels, with reduced debt levels at the end of the projection period equivalent to those under the baseline scenario. From the brief review in can be found that public debt burden hasa negative impact on the economic growth of a country, its impact on investment and other economic indicator varies depending on a countrys close of indebtness.Situation of Public Debt Burde n in BangladeshPublic debt is of two types- i) external debt and ii) domestic debt. The amounts of domestic debt are estimated by the Ministry of Finance of Bangladesh government.Figure 1 Budget Deficit, External Loan, Domestic Loan, and Net Loan from Banking and Non-banking Sector of Bangladesh from1993-2012 (amounts in 00 crore taka)Source Bangladesh Economic Review 2005-06 and 2011-12From the above graph it can be found that the budget deficit of Bangladesh government is increasing from year to year and it is covering a sharp increment in deficit from the fiscal year 2008-09 onwards. The domestic debt burden and govt.s reliance on reference work from banking channels are showing a sharp increase from the fiscal year 2009-10 onwards. However the dependence on external credit is showing a declining trend. Research objective and SampleThe objective of this research is to happen the empirical relationship between public debt burden and economic growth of Bangladesh. For this purpo se time series econometric tools have been used. Various variables that indicate debt burden parameter and growth condition have been taken in to consideration. The sample period of the study is 32 years, from 1980-81 to 2011-12. info used in this study has been collected from secondary source. Data and Methodology* Nature of the Variables In this study variables used are- Debt Burden (DB), where DB is stands for Debt Burden that is sum of Domestic Debt and foreign debt outstanding at the end of each period, calculated as percentage of GDP Gross Domestic Product (GDP) growth rate manufacturing production growth rate (Manf) total investment as percentage of GDP (Inv) and totalexport as percentage of GDP (Exp). * Data Collection Data series of these variables is collected from Bangladesh Economic Survey/ Review (various issues), Monthly Economic Trends (various issues) and Statistical Year Book of Bangladesh (various issues). * Method of tenderness At first the stationary property o f the univariate time series data has been examined. Augmented Dickey-Fuller (ADF) test has been used to test the unit roots of the concern time series variables (Dickey and Fuller, 1979). The extended maintained regression used in the ADF test can be expressed in its most general form as (1)Where, is the drift term, denotes the time trend, and is the largest lag length used. In this model, H0 =There is unit-root & H1 = There is no unit-root. Then, the time series has been examined for co-integration. Co-integration analysis helps to identify long-run economic relationship between two variables. Granger and Newbold (1974) mention that, co-integration analysis is important because if two non-stationary variables are integrated, a Vector Autoregression (VAR) is misspesified callable to the impact of a common trend. If co-integration can be identified between the variables then the model should include the residuals from the vectors (lagged one period) in the dynamic Vector Error Co rrecting Mechanism (VECM) system. If the variables are not co-integrated then Vector Autoregression (VAR) model is used. (2)The bivariate vector autoregressive model has two dependent variables y1,t and y2,t, where t = 1, , T. The education of the series should be explained by the common past of these variables. That means, the explanatory variables in the simplest model are y1,t-1 and y2,t-1. The VAR (1) with lagged values for every variable is heady by (3)y1,t= 11y1,t-1+12y2,t-1+1,ty2,t=21y1,t-1+22y2,t-1+2,1In this model the assumptions about error ground are-* The anticipate residuals are zero,Ei,t=0 with i=1, 2* The error terms are not auto-correlatedEi,t.j,=0 with tHowever, VAR-Models themselves do not allow us to make statements about causal relationships. This holds especially when VAR-Models are only approximately adjusted to an unknown time series process, bit a causal interpretation requires an underlying economic model. However, VAR-Models allow interpretations about the dynamic relationship between the indicated variables. (4)The Johansen approach can be used to carry out Granger causality test as well. Granger (1969) developed a test approach to proof if a time series X contributes to the prediction of another series Y. Granger Causality is exists if the mean squared forecast error (MSE) by using the series X in the forecast model is smaller than without consideration of X MSEYYt+hIt23..k and r0 ranges from zero to k-1 depending upon the stage in the sequence. This is relevant test statistics for the worthless hypothesis r r0 against the alternative r r0 + 1. The second test statistic is the utmost Eigen value test known as max(r0). This is closely related to the trace statistic, but arises from changing the alternative hypothesis from r r0 + 1 to r = r0 + 1. The idea is to improve the power of the test by constricting the alternative to a co-integration rank which is just by one more than the null hypothesis. The max test statistic is max(r0) = -T in (1- i) for i = r0 + 1The null hypothesis is that there are r cointegrating vectors, against the alternative of r + 1 cointegrating vectors. Johansen and Juslius (1990) indicated that the trace test might lack power relative to the maximum Eigen value test. Based on the power of the test, the maximum Eigen value test statistic is often preferred. Estimation and ExplanationTo examine the impacts of public debt burden on the economic growth of Bangladesh for the time period of 1980-81 to 2011-12, the research results and their explanations are presented in this section.