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Impact of Public Debt Burden on Economic Growth of Bangladesh: a Var Approach

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Impact of Public Debt Burden on Economic Growth of Bangladesh: a Var Approach
Impact of Public Debt Burden on Economic Growth of Bangladesh: A VAR Approach

Md. Hashibul Hassan
Lecturer
Department of Finance
Jagannath University
Dhaka, Bangladesh.
Email: hashibulhassan@yahoo.com

Tahmina Akhter
Lecturer
Department of Finance
University of Dhaka
Dhaka, Bangladesh.
Email: tahmina25@gmail.com

Impact of Public Debt Burden on Economic Growth of Bangladesh: A VAR Approach

Abstract

Bangladesh is relying heavily on public debt to meet the budget deficit since its independence. In this paper, the objective is to find out whether the government of Bangladesh is excessively borrowing from the public sources and thus negatively affecting the economy of the country. For this purpose GDP growth rate (GDP), manufacturing sector growth rate (MANF), investment as percentage of GDP (INV) and Export as percentage of GDP (EXP) have been selected for judging the impact of public debt burden (DB) on these variables. The study period is 1980-81 to 2011-12. Augmented Dickey-Fuller test has been used to diagnose whether the time series data are non-stationary. Granger Causality test has been performed to identify whether DB can be used for prediction of GDP, MANF, INV and EXP, and vice-versa. Then on the basis of the result of Johansen co-integration test, Vector Autoregressive (VAR) model has been used to find out the long term association between each set of variables. But, the result shows that in Bangladesh, there is no long term statistically significant association of DB with any of the above mentioned economic indicators. Thus, it can be said that public debt burden has no positive or negative impact on the economic growth of Bangladesh.
Keywords: Public Debt Burden, Economic Growth, Domestic Debt, External Debt, Johansen Co-integration, Granger Causality
JEL Classification Codes: C22, H68, R42, E62, O11

1. Introduction
Bangladesh, a young country burdened with scant natural resources and a burgeoning population, has always depended on loans and grants
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