Assessing public debt sustainability under COVID-19 uncertainty: Evidence from Côte d'Ivoire.

Abstract

This article investigates public debt sustainability, in the context of a novel exogenous shock, by proposing a realistic forecasting procedure. The procedure implies the combination of a Bayesian VAR model and a nonlinear fiscal reaction model to derive a large number of simulated public debt paths and construct a probabilistic debt sustainability indicator. Annual data covering the period from 1970 to 2019 are used in the African context, with Côte d'Ivoire as a case study. Forecasts suggest low probabilities of non‐increasing trend and well‐contained upside risks (16%–27%) in Côte d'Ivoire for the forecasting period 2021–2024, regardless of the scenario underlying the evolution of COVID‐19 and suggesting that the country remains vulnerable to debt distress risks. Government should promote a sound and reliable debt management system to mitigate such risks. Results also highlight the importance of domestic resources mobilization in reducing the country's fiscal vulnerability and building a sustainable post‐COVID recovery.