Public Foreign Debt and Economic Growth in Ukraine

Abstract

On the surface, a rapid accumulation of public external debt over the last few years has been motivated by the logic of stabilisation policy, following a deep recession during the 2008–2009 financial crisis and slow post-crisis recovery. However, it is exactly the excessive build-up of foreign debt that is blamed for recent macroeconomic difficulties. Based on the quarterly data for the years 2000–2013, it was found within the SVAR framework that an increase in public foreign debt is associated with a short-lived increase in output, with a decline in that indicator to follow, and nominal exchange rate depreciation, with no impact on the current account. On the other hand, either the current account deficit or the exchange rate depreciation contribute to a higher debt level, while there is no output effects on the public foreign debt. Among other results, the exchange rate depreciation brings about an improvement in the current account, but its impact upon the output is restrictionary. Also, there is a virtuous two-way causality between the output and the current account that underlines the importance of external equilibrium for Ukraine’s economy. Our results are robust to changes in the length of the data sample and the choice of industrial output as a proxy for output.