Abstract
This study has assessed the role of existing policies in determining the state of debt sustainability for the Pakistan economy (1980- June 2019) through fiscal reaction function. This
study adds to the literature in two aspects. First, a policy index has been constructed to formulate a debt-policy interactive term that implies whether or not existing macroeconomic policies
contribute in making external debt sustainable in Pakistan. Second, this study has gauged the
potential sustainable external debt through in-sample forecast method. The estimated results
obtained by the ARDL method show that Pakistan has just entered into a phase of unsustainable
debt burden in the long run as fiscal reaction analysis exhibits the weak significant negative
relationship between primary balance and external debt to GDP ratio. Moreover, existing macroeconomic policies also show a negative association with the primary balance that implies the
ineffectiveness of policies in making external debt sustainable for Pakistan. This study suggests
that an increase in foreign inflows through remittances or export earnings may improve the
debt sustainability state in Pakistan
Sadia Mansoor, Irfan Lal, Mirza Aqeel baig. (2020) Can Pakistan Raise More External Debt? A Fiscal Reaction Approach, Business & Economic Review, Volume 12, Issue 3.
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