Debt Sustainability Research Articles

The economic implications of Nigeria’s foreign debt servicing and sustainability

Despite extensive literature examining the role foreign debt plays in the growth of the Nigerian economy, seldom do they simultaneously consider the effect of external debt servicing and sustainability. Accordingly, this study examined the impact of external debt servicing and sustainability on the economic growth of Nigeria for the period between 1980 and 2022. The auto-regressive distributed lag (ARDL) model was adopted to measure the effect of the explanatory variables on the dependent variable. Empirically, the study demonstrated that the impact of debt sustainability was insufficient on the economy; notwithstanding being positive in the long run. Thus, suggesting the presence of a sovereign Ponzi finance in Nigeria’s debt management. However, the effects of external debt servicing and foreign debt interest payment were significant and negative on the economy in the short and long run periods. Thus, showing that resources being used to service the debt of the nation, crowd-out funds that could have been used to spur growth of the economy. Generally, the study affirmed the applicability of the debt-overhang hypothesis for the country. Conversely, exchange rate significantly and positively impacted the economy, indicating that an improvement in the value of the Naira, will be indicative of an improvement in the economy. Hence, the study recommends amongst others that effective external debt management strategies such as the debt for equity swap programme should be adopted by fiscal authorities in the country.

An Empirical Analysis on Institutional Quality, Fiscal Policy and Debt Sustainability in Sub-Saharan Africa (SSA)

Many Sub-Saharan African (SSA) countries are finding it difficult to fulfill their massive debt repayment obligations, which bilateral financial institutions have declared to be unmanageable. Government institutions are to blame for such disparities in the budgetary components, which have been empirically confirmed to be detrimental. Part of the reason for SSA's income generation and debt management problems is related to fiscal policy components where there has been an unwarranted exaggeration of government expenditure. Accordingly, the current study used a panel Autoregressive Distributed Lag (ARDL) to examine how fiscal policy and institutional quality affected the sustainability of debt in 48 SSA nations between 2008 and 2022. The study’s findings suggested that the elements of fiscal policy (expenditure and revenue) as well as indicators of institutional quality (governance), such as control of corruption, effectiveness of government, political stability, absence of violence, regulatory quality, the rule of law, voice, and accountability, were important in explaining the long-term sustainability of public debt. The speed of adjustment to the long-run equilibrium was slow, which may be related to the unstable governance in each of the cross-sectional nations. Hence, the study concluded that the interactive effects of institutional quality and fiscal policy significantly influenced debt sustainability in the long run. The study’s conclusions can be very helpful to policymakers, particularly in those nations where major fiscal and external imbalances are being generated by low ratings for key institutional quality indices.

Expenditure Rules: Limiting the Level or the Variation of Public Expenditure?

The main goal of the first-generation expenditure rules was to ensure fiscal discipline: preserving a sound fiscal framework and public debt sustainability. Regarding this goal, analytically as well as empirically, limiting the share of public expenditure in GDP would be more appropriate in case of weak potential economic growth or if the public expenditure-to-GDP ratio is high. On the contrary, limiting the variation of public expenditure would be more appropriate for countries with high potential economic growth or with a weak public expenditure-to-GDP ratio. The second goal of expenditure rules is to contribute to sustaining economic activity. Regarding this goal, limiting the level of public expenditure appears as more favorable than limiting the variation of public expenditure. Indeed, a rule in terms of variation could hamper economic growth, especially for countries with a high public expenditure-to-GDP ratio.

Sustainability of External Debt in Developing Countries: An Empirical Evidence

The paper attempts to investigate the issue of sustainability of external debt in developing countries for the period of 1980 to 2020. We have used the standard intertemporal approach of current account balance to examine the issue of external debt sustainability. The results of standard panel cointegration models reveal that external debt in developing countries is found to be sustainable for the given period since a strong cointegration between exports and imports is found in these countries. This cointegration between exports and imports necessarily implies that developing countries are satisfying their external constraint or the solvency condition which restricts them from lending or borrowing in international financial markets for indefinite time. Besides, strong cointegration also implies that developing countries are generating enough trade surpluses today which makes them unable to finance their future external debt thereby posing no issue for the sustainability of external debt.

Socio economics impacts of CPEC on Pakistan; the dark side of the project

The China-Pakistan Economic Corridor (CPEC) is a flagship project under China's Belt and Road Initiative (BRI) with significant investments in energy projects, infrastructure development, and special economic zones. While CPEC has been praised as a game-changer for Pakistan but major concerns have been raised about its negative socio-economic impacts. This research article spreads light on a comprehensive literature review to find out these impacts and identify research gaps that the researchers have not filled yet. This paper reveals that CPEC intensifies existing socio-economic inequalities, displaces local communities, causes environmental degradation, and raises concerns about debt sustainability of Pakistan. The lack of transparency in project execution has further boosted these issues. In this paper I have examined the experiences of aboriginal communities and gendered repercussions, investigated labor rights and waged conditions, and environmental impacts. As the project is still not fully completed, new issues may arise with the completion and passage of time. By conducting the research further deep, policymakers can gain a better understanding of the potential outcomes of CPEC and develop strategies accordingly to eliminate any negative impact that can be hazardous for Pakistan's economy, environment, and society.

Міжнародні боргові метрики в контексті фінансування "зеленого" порядку денного

The article summarizes the public debt policy issues in the context of financing climate change measures, and suggests priorities and mechanisms of fiscal, debt and sectoral policies to ensure sufficient financing of the green agenda. Authors have emphasized the trilemma between achieving climate goals, maintaining fiscal sustainability, and ensuring political capacity. It has been found that even under favorable external financial conditions, climate-vulnerable countries face a constant premium to the cost of borrowing. As a result, developing countries with high levels of debt and climate vulnerability are caught in a vicious circle of growing investment needs for climate- sustainable structural transformation and significant dependence on increasingly expensive debt financing, which leads to a combination of deteriorating debt sustainability and insufficient funding for climate change challenges. Authors argue for a comprehensive multilateral policy aimed at reforming the international debt architecture and increasing the amount of available financing for climate change adaptation under a government-led framework. Achieving common goals requires a carefully calibrated combination of climate change mitigation instruments based on enhanced domestic revenue mobilization, in particular through carbon pricing, more efficient spending on transfers, green subsidies and investments, and regulatory measures. Authors propose a comprehensive approach to implementing climate change mitigation policies, including the implementation of a fiscal strategy, sectoral policies to prevent climate change, and stimulating private investment. Emphasized the importance of developing further tools for incorporating climate policy into debt sustainability analysis.

DEBT POLICY OF UKRAINE IN THE CONDITIONS OF MODERNIZATION OF PUBLIC FINANCES

Since the full-scale invasion of Russian Federation, public finances (PF) have been operating under conditions of uncertainty and unprecedented security challenges, akin to those experienced by the entire economic system. The level of uncertainty is such that it overshadows the current financial crises and parity with the consequences of the Second World War. This became the core objective of the study, which consisted of substantiating conceptual approaches to the formation of debt policy, considering the peculiarities of the projection of martial law on the functioning of PF. The research employs a systematic approach to methodology, integrating methods of factual and situational analysis that are grounded in international standards for public debt assessment and theoretical generalisations. Furthermore, through a comparative analysis, the interrelationships and mutual influences between debt policy and budget strategy are monitored. Furthermore, the study assesses the potential of leveraging the frozen Russian assets to support Ukraine's post-war recovery through the PF system. The study revealed that the debt policy is an integral component of the PF system. Unlike other program documents, it demonstrated resilience to both endogenous and exogenous challenges and the capacity to implement corrective measures during economic crises. This has laid the foundation for a Marshall Plan-like strategy for Ukraine. The PF strategy, which was approved just before the outbreak of the Russian-Ukrainian conflict, prompted discussions on enhancing the predictability of budgetary policy and debt sustainability. This, together with the adoption of a medium-term public debt management strategy, became the basis for the actual establishment of the Debt Agency as a legal entity, which in the future will ensure, on the one hand, the privileging of grants among the financial mechanisms for covering the budget deficit, and, on the other hand, an additional level of budgetary strategy for generating a multiplier effect from the borrowed funds for post-war reconstruction. On the other hand, this approach will create conditions for the transition from external sources of financing the budget deficit to internal ones by expanding and diversifying the range of investors in government securities. It is proved that debt policy in both the short and medium term will serve as the basis for the implementation of the budgetary strategy of post-war reconstruction, and will create conditions for accelerating the process of forced reparations to compensate for the damage caused by the Russian Federation.

An Empirical Analysis of Public Debt Sustainability in Kenya

The study provides a focused analysis of Kenya’s determinants of debt sustainability owing to its consistent budget deficits and higher debt servicing costs. Unlike broader studies, this research focuses on Kenya's unique economic conditions and talks about the consequences of unchecked debt servicing payment failures in Kenya that could undo macroeconomic progress if unchecked. The study deploys a single equitation regression analysis followed by a series of robustness checks and a generalized method of moments (GMM) technique to analyze the link for Kenya, 1990-2023. The regression results show that debt in Kenya is not sustainable, with factors such as an increase in debt stock, high-interest rate costs, increase in budget deficits, inflation rate increase and high depreciation of the local currencies ultimately wiping out the repayment potential of Kenya. However, the results show that increased export revenue earnings and faster economic growth can improve budget resources for debt servicing. Our findings suggest that policymakers in Kenya should focus on fiscal consolidation by reducing non-interest expenditures and enhancing revenue collections.

Application of Article 6-Linked Debt-for-Climate Swap for the Clean Energy Transition in Africa

This study presents an innovative financial model that integrates the debt-for-climate swap mechanism with Article 6 of the Paris Agreement, specifically designed to support Africa’s transition to clean energy. The model connects debt-for-climate swaps with the creation of internationally transferred mitigation outcomes (ITMOs), offering mutual benefits for both debtor and creditor nations. This approach aims to improve the debt sustainability of African countries while strengthening their climate resilience by combining Article 6 of the Paris Agreement with Official Development Assistance (ODA). Additionally, this model aligns with key Sustainable Development Goals (SDGs), including SDG 7 (Affordable and Clean Energy), SDG 13 (Climate Action), and SDG 17 (Partnerships for the Goals). Furthermore, the study proposes a restructuring of existing environmental safeguards by incorporating the “Do No Significant Harm” (DNSH) criteria and environmental contribution indicators to ensure alignment with the minimum safeguards mandated by Article 6 and international development standards. Through quantitative analysis, our findings indicate that the proposed debt-for-climate swap model could significantly contribute to Africa’s clean energy transition, address the region’s external debt challenges, and enhance climate resilience.

Debt Sustainability Analysis in Reformed EU Fiscal Rules

Debt Sustainability Analysis in Reformed EU Fiscal Rules

Is Islamic Banking Sustainable in Terms of Financial Performance? Empirical Evidence from GCC Countries

The aim of this study is to evaluate the Islamic banking sector with the help of financial performance criteria and to reveal whether the sector is sustainable or not. The sustainability analysis uses the latest unit root tests that take into account Fourier expansions. The study uses unit root tests, which are generally used to analyze the sustainability of public debt, with updated versions that differ from the literature and with the help of financial performance indicators of the banking sector for sustainability analysis. The study uses the data of the Islamic banking sector operating in the member countries of the Gulf Cooperation Council (GCC) for the 4th quarter of 2013 and the 2nd quarter of 2022. The quarterly data of “ROA, ROE and Net Profit Margin” are considered as financial performance indicators for sustainability analysis. Although the results of the empirical analysis show different results for each of the financial indicators of Islamic banking in the analyzed countries, in general it shows that the Islamic banking sector operating in all GCC countries except the UAE is sustainable in terms of the financial indicators used in at least one category. These results show that the development of Islamic banking is real and promising for the future. Therefore, the development of projects that contribute to the development of the Islamic financial sector and the support of this sector is an important responsibility for the relevant parties. It is expected that these results will provide important signals to the policymakers of the respective countries and contribute to the healthy development of the Islamic banking sector.

Nonlinear Effects of Inflation on Public Debt Sustainability in Somalia

Nonlinear Effects of Inflation on Public Debt Sustainability in Somalia

Trade Gap and Public Debt Sustainability in Nigeria

Trade Gap and Public Debt Sustainability in Nigeria

Industrial and innovation policies in times of crisis: a widening technological divide?

Purpose The purpose of this paper is to analyze the ongoing revival of industrial and innovation policies across developed and developing economies. Design/methodology/approach The paper compare the scale and scope of recent industrial and innovation policy initiatives across developed and developing economies. Also, it analyzes recent data regarding R&D investments and other innovation indicators. Findings There are enormous disparities across economies in their capacity to implement industrial policies, particularly those to support science, technology and innovation. Most developed economies, and a few developing economies, are implementing bold, ambitious and medium-term innovation policies towards bolstering R&D investments, supporting advanced manufacturing and green energies and strengthening technological capabilities. Amid lack of fiscal policy space and vulnerable debt sustainability positions, institutional deficiencies and weak innovation ecosystems, developing economies – particularly in Africa and Latin America – face enormous challenges to implement strategic industrial and innovation policies. Research limitations/implications Under the current economic, financing and institutional conditions, together with subdued global trade and ongoing geopolitical fragmentation, the technological divide and innovation asymmetries across economies will likely widen even further, paving the ground for a “development divergence” in the coming decade. Originality/value The paper analyzes the implications of the current industrial and innovation policy trends across developed and developing countries. Under the current economic, financing and institutional conditions, together with subdued global trade and ongoing geopolitical fragmentation, the technological divide and innovation asymmetries across economies will likely widen even further, paving the ground for a “development divergence” in the coming decade.

Fiscal Policy Determinants of Health Spending in India: State Versus Center

This study uses data from 1986 to 2021 and the auto-regressive distributed lag model to explore India’s fiscal policy determinants of government health spending. The results find two structural breaks in time: (i) 2002 for state government health spending (SGHS) and (ii) 2014 for central government health spending. The results also show that central revenue transfers to states have a positive and statistically significant effect on SGHS in the long run. The results imply that a 1% rise in central revenue transfers to states leads to a 0.399% increase in SGHS. Further, state government public debt exhibits a negative and statistically significant relationship with SGHS, implying that a 1% rise in public debt leads to a 0.119% fall in SGHS in the long run. Fiscal management (i.e., revenue mobilization and debt sustainability) is essential to prepare a long-term strategy for health-care financing.

Threshold-based influence of currency devaluation on external debt sustainability: Insights from smooth transition regression and multiple thresholds nonlinear ARDL approaches

This study offers unique insights into the threshold-based influence of currency devaluation (CD) on external debt sustainability (EDS) in designated Sub-Saharan African (SSA) countries. The absence of evidence from this viewpoint, particularly in SSA, inspires this new assessment. On this premise, the study utilizes two innovative estimation procedures: smooth transition regression (STR) and multiple thresholds nonlinear ARDL (MTNARDL) to estimate the sign-based and magnitude-based asymmetric influence of CD on EDS. The outcomes indicate that first, an average CD threshold of 21.1% is consistent with EDS in the designated nations; second, a small CD significantly reduces the external debt–GDP ratio and improves sustainability, while a very high CD largely worsens the EDS problem; third, in the CD regime, devaluation has more detrimental effects on external debt burden; fourth, exceedingly large changes in exchange rate (whether positive or negative) essentially affect the countries’ EDS negatively; and fifth, the adverse effect of large depreciation on EDS is greater than that of large appreciation. The study recommends, amongst others, that heavily indebted countries with sizeable external debt denominated in foreign currency should, as a matter of urgency, avoid excessive and escalated large percentages of devaluation or exchange rate depreciation.

Fiscal Resilience or Vulnerability? Assessing Public Debt Sustainability in the Developing Countries During 1996–2020

Fiscal Resilience or Vulnerability? Assessing Public Debt Sustainability in the Developing Countries During 1996–2020

Supplement to 2018 Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries

Supplement to 2018 Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries

Unveiling the African growth puzzle: relationship between financial inclusion, debt sustainability and economic growth

Unveiling the African growth puzzle: relationship between financial inclusion, debt sustainability and economic growth

Globalization and fiscal policy after financial crises

Has globalization affected the use of fiscal policy as a macroeconomic stabilization tool in response to financial crises? We study this question in an empirical model using different dimensions of globalization – political, social, and economic – and de facto and de jure measures of the different dimensions. By estimating Jordà (2005)-type local projections, we first document that higher political, social and economic globalization matter for the policy response to financial crises, producing more contractionary or austerity policies in terms of the high-employment surplus after distress. High initial debt-to-GDP ratios exacerbate to some extent the effects of globalization, producing additional fiscal austerity after financial distress. Second, we find that countries’ degree of policies and conditions that enable or restrict international flows and activities – hence policies “on paper” – matter most for the effects of globalization on the dynamics of fiscal policy after a financial distress, compared to the actual degree of such flows, that is, policies “in practice”. In total, using of fiscal policy as a macro stabilization tool in an environment of increased globalization appears to be restricted. Accommodation and reinforcement of debt externalities, fiscal spillovers and contagion ensuing from increased globalization may have contributed to policymakers’ concerns about debt sustainability and sovereign risk, thus influencing the fiscal policy response.