Impact of Public Debt Burden on Economic Growth of Bangladesh Essay

AbstractBangladesh is relying heavily on worldly concern debt to meet the compute famine since its independence. In this make-up, the design is to invent divulge whether the establishment of Bangladesh is excessively borrowing from the ordinary sources and consequently interdictly affecting the thriftiness of the realm. For this mapping gross domestic product offset ordinate (GDP), manufacturing sector harvesting wander (MANF), enthronement as dower of GDP (INV) and exporting as percentage of GDP (EXP) hold back been selected for judging the wedge of man debt point (DB) on these variables. The resume fulfilment is 1980-81 to 2011-12. augment Dickey-Fuller strain has been apply to diagnose whether the eon serial publication entropy are non-stationary. farmer causality demonstrate has been performed to identify whether DB back tooth be used for prescience of GDP, MANF, INV and EXP, and vice-versa.Then on the basis of the take of Johansen co-integra tion canvass, sender Autoregressive (VAR) prototype has been used to view divulge the persistent term railroad tie amid each set of variables. But, the entrust shows that in Bangladesh, there is no dogged term statistically signifi fuelt crosstie ofDB with any of the above mentioned sparingal indicators. Thus, it can be said that habitual debt accuse has no positive or negative intrusion on the scotch harvest of Bangladesh. Keywords frequent Debt consign, Economic Growth, house servant Debt, External Debt, Johansen Co-integration, granger Causality JEL categorization Codes C22, H68, R42, E62, O111. IntroductionBangladesh, a young land lodeed with scant natural resources and a burgeoning population, has always depended on loans and grants to fulfill its ambitions and thus deficit budgets arrive at become the norm. work out deficits are financed by- printing money, foreign borrowings and municipal borrowings and running down foreign transfigure reserves. According to the economists and interrogationers, Bangladesh is using all quad options mentioned above and corporate trust of Bangladesh government on foreign and home(prenominal) help loans is crowding out private investings and thus stifling the scotch growth. Excessive dependency on state-supported debt will not exclusively frustrate the catamenia sparing growth provided also will affect the parsimoniousness negatively in the long run, as the future generations build to bear the turn on of large amount of debt servicing. This canvas is aimed at drawing empirical evidence, whether heavy reliance on macrocosm debt in per annum budgets is hampering the scotch growth of the country. in that location is frequently debate on the issue whether existence borrowing has a positive or negative relationship with the economic growth of a country. According to the followers of innocent school of thoughts of economics, man debt slows down the economic growth of a country and public debt should be kept as minimal as possible. barely, the Keynesian economists are exceedingly flexible some public borrowing. The paper is arranged as follows the first component introduces the demand the second ingredient describes the current scenario and trends of budget deficit and public debt charge up of Bangladesh the findings of the related literature are reviewed in the third section the fourth and twenty percent sections concern the research objective, pretenses specification, taste size and sources of data and definitions of the related variables the esteems and expositions of the analyses are presented in the sixth section and the final section consists of a summary and conclusion of the study.2. publications ReviewA large scrap of studies had been conducted to identify the meet of public debt burden on the economic growth of a country across the world. In Bangladesh a several number of research studies had been through on the sustainability of public debt burden and on the crowding out effect. However in Bangladesh very few studies have been do using the Vector Auto-regressive model, to identify the relate of public debt burden on the economic growth of the country. Fosu (1996) investigated the debt jut out supposal by studying 13 severely obligated(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 mode for panel data. The author engraft the negative and robust relationship in the midst of enthronization and international debt. Qureshi & Ali (2010) analyzed the bushel of high 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 plunge by the authors. Ahmed & Shakur( 2011) performed a research to cotton up the prob lems created by the debt ( outer debt) to economic growth of Pakistan. They have used the building block root taste and Johansen co-integration to analyze beat serial data from FY 1981 to FY 2008. The Granger Causality Vector erroneousness bailiwick (GCVEC) method proved unifacial relationship between outer debt and growth rate of GDP per capita. Wijeweera, Dollery & Pathberya (2005), investigated the connections between impertinent debt servicing and economic growth in Srilanka during 1952-2002 by using co-integration methodology for the long run defect correction method for the short run.they find negative impact of debt servicing on the economic growth but insignificant. Theason is that the external indebtness is not too high in Srilanka.The result request that Srilanka does not 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 put up that the high indebtness of these small Carribean countries is cause negative economic growth rate. Ogunmuyiwa (2011) take apartd whether external debt actually promotes economic growth in developing countries using Nigeria as a case study. Time serial publication data from 1970-2007 were fitted into the regression equation using various(a)econometric techniques such as increase Dickey Fuller (ADF) shield, Granger occasion test, Johansen co-integration test and Vector Error Correction Method (VECM). Empirical results reveal that source does not exist between external debt and economic growth as antecedent 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 most algebra methods. From a study of International monetary Fund (2008), Bangladeshs risk of debt affliction is low based on external debt indicators. Bangladeshs external debt burden indicators do not breach the germane(predicate) policy-dependent revelatory thresholds chthonic the baseline scenario and exhibit only a marginal breach downstairs the stress tests. Debt burden indicators are significantly worse when domestic debt is included. Accordingly, this analysis reveals a to a greater extent elevated risk of debt damage on public debt compared to results based simply on external debt. Staffs will supervise 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 i nterest rate has been estimated by analyzing the unit root test, co-integration test and the mistake correction model.The main findings of the study do not corroborate the crowding-out meditation in Bangladesh, rather, provide the evidence of crowding-in effect. Gunter & Rahman (2008) used the debt acoustic protrusion module, to project the evolution of Bangladeshs public debt over a 15- division horizon (from financial year 2006 to financial year 2021) under three different macroeconomic scenarios and both different financing scenarios of an ambitious government-led investment strategy. The results of the debt scenario implied that increases 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 similar to those under the baseline scenario. From the brief review in can b e 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 extent of indebtness.Situation of Public Debt Burden in BangladeshPublic debt is of devil 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 terminal Loan from Banking and Non-banking Sector of Bangladesh from1993-2012 (amounts in 00 crore taka) cite Bangladesh Economic Review 2005-06 and 2011-12From the above chart it can be found that the budget deficit of Bangladesh government is increasing from year to year and it is showing a cunning increment in deficit from the fiscal year 2008-09 onwards. The domestic debt burden and govt.s reliance on cite from banking channel are showing a tart 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 give away the empirical relationship between public debt burden and economic growth of Bangladesh. For this purpose time series econometric tools have been used. Various variables that indicate debt burden disceptation 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 bang-up at the end of each period, calculate as percentage of GDP piggish Domestic Product (GDP) growth rate manufacturing production growth rate (Manf) perfect 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 scan/ Review (various issues), Monthly Economic Trends (various issues) and statistical Year Book of Bangladesh (various issues). * Method of theme At first the stationary situation of the univariate time series data has been examined. increase Dickey-Fuller (ADF) test has been used to test the unit roots of the concerned time series variables (Dickey and Fuller, 1979). The extended maintained regression used in the ADF test can be expressed in its most universal 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 ii variables. Granger and Newbold (1974) noted that, co-integration analysis is important because if two non-stationary variables are integrated, a Vector Autoregression (VAR) is misspesified collectable to the impact of a universal trend. If co-integration can be identified between the variables whence the model should include the residuals from the vectors (lagged one period) in the dynamic Vector Error Correcting weapon (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 study 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 all(prenominal) variable is determined 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 foothold are-* The expected residuals are zero,Ei,t=0 with i=1, 2* The error damage are not auto-correlatedEi,t.j,=0 with tHowever, VAR-Models themselves do not leave us to make stat ements about causal relationships. This holds especially when VAR-Models are only some adjusted to an un cognize time series process, while a causal interpretation requires an underlying economic model. However, VAR-Models allow interpretations about the dynamic relationship between the indicated variables. (4)The Johansen go on can be used to enthral out Granger causality test as well. Granger (1969) developed a test approach to proof if a time series X contributes to the prophecy 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 null hypothesis r r0 against the resource r r0 + 1. The second test statistic is the maximum Eigen value test known as max(r0). This is closely related to the touch modality statistic, but arise s from changing the alternative hypothesis from r r0 + 1 to r = r0 + 1. The thought process is to improve the power of the test by limiting the alternative to a co-integration run 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 congress 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.