Estimating Optimum Growth-Maximizing Public Debt Threshold for Nepal

  • Gopal Prasad Bhatta Former Executive Director of Nepal Rastra Bank
  • Anu Mishra Kings College, Nepal
Keywords: Public debt, economic growth, Laffer-curve, developing economies, growth maximizing debt threshold

Abstract

One of the common agenda of underdeveloped economies is to achieve a high and sustainable level of economic growth in the long run. Domestic and external borrowings are playing a crucial role in fulfilling the resource gap in the context of Nepal for a long period. A growing number of recent studies support the idea of a debt threshold level (turning point) above which debt starts reducing economic growth. This paper empirically investigates the relationship between economic growth and several other factors (investment, trade openness, population growth, domestic savings, and government debt) in the context of Nepal. The debt-growth relationship has been estimated by regression analysis and further explored the non-linear relationship between public debt and economic growth using time series annual data for the period of 1976-2019. The ARDL bound technique has been applied to estimate the short-run and the long run impact of debt on economic growth. Moreover, a quadratic bivariate model based on ARDL coefficients has been estimated to identify the growth maximizing level of debt. The estimated parameters confirm the optimum public debt to GDP ratio in the context of Nepal is 33 per cent. The policy implication of this finding for the Government of Nepal (GoN) is to ensure public debt management in line with the growth maximizing debt threshold. Further, a high level of trade deficits and government effectiveness in public sector management squeezes the fiscal space in utilizing adequate public debt in Nepal.

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Author Biographies

Gopal Prasad Bhatta, Former Executive Director of Nepal Rastra Bank

Dr. Bhatta, is a former Executive Director of Nepal Rastra Bank (Central Bank of Nepal),
banking expert in the high level “Sick Industry Rehabilitation Committee” formed by GoN,
public debt expert and consultant, and associated with many colleges of Tribhuvan University
(Nepal), Pokhara University (Nepal), Westcliff University (USA), University of the West
England (UWE) as a visiting Faculty of Financial Management, Financial Derivatives and Risk
Management and Investment Analysis.

Anu Mishra, Kings College, Nepal

Ms. Mishra is an MBA graduate from Southwestern Oklahoma State University (USA) and an
MA (Economics) from Tribhuvan University (Nepal), also lecturer of micro and
macroeconomics in Kings College, Nepal and freelance researcher in public and financial
economics.

Published
2020-10-01
How to Cite
Bhatta, G., & Mishra, A. (2020). Estimating Optimum Growth-Maximizing Public Debt Threshold for Nepal. NRB Economic Review, 32(2), 1-28. https://doi.org/10.3126/nrber.v32i2.35298
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Articles