Determining the Macroeconomic Factors of External Debt in Bangladesh: A Time Series Analysis
Introduction:
The recent sharp increase in external debt of Bangladesh is slowly raising the questions of external debt sustainability and future ability of debt servicing. The questions get the more importance in the context of recent current account deficit. Moreover, Bangladesh's entrance in the middle income country club has also implications in future debt servicing and debt burden as external debt is getting costlier than it was before. In this scenario, this study will try to find out the key macro-economic determinants of external debt in Bangladesh through a time series analysis.
Objectives:
This study will be done in two sections.
In the first section, we will try to understand the current condition of external debt of Bangladesh. We will try to understand that by using different well-known internationally recognized parameters like External Debt to GDP Ratio, Short-term Debt to Reserve Ratio, and Interest Expense to Export Ratio.
And, in the second section, we will try to find out the major macro-economic determinants of external debt in Bangladesh through a time series analysis.
Finally, we will try to address any policy implications from our findings.
Literature Review:
The literature regarding the determinants of external debt is rich, archaic and globally diversified. However, we find some particular studies are more important and relevant for our study. For example, Awan, Anjum and Rahim in 2014 examined the macroeconomic determinants of external debt in Pakistan By applying ARDL model results depicted that Fiscal deficit, Nominal exchange rate and Trade openness are statistically significant determinants of external debt as they increase the debt burden of Pakistan.
In another study by Abdullahi, Abu-Bakar and Hassan in 2015 found that external debt accumulation in Nigeria is determined by macroeconomic components of interest rate, national savings, exchange rate and budget deficit in both long and short run.
Al-Fawwaz in 2014 investigated the major determinants influencing the external debt in Jordan by applying ARDL model where independent variables were trade openness, term of trade, exchange rate, and gross domestic product per capita. He concluded that there is a positive statistically significant effect of trade openness on the external debt in the long run, and a negative statistically significant effect for the gross domestic product per capita variable (GDPpc) on the external debt.
Lau and Lee analyzed the role of some macroeconomic variables in determining the ED burden in Thailand and the Philippines from 1976 to 2013. The results indicated the existence of short-run linkages originated from inflation rate (Consumer Price Index [CPI]) and real interest rate [RIR] to External Debt in the case of Thailand. As for the Philippines, although there is no evidence of short-run linkages origin from gross domestic product (GDP), CPI, RIR and M2 to External Debt, but the burden of short-run adjustment appears to have fallen mostly on GDP and M2.
In another research, Lau and Lee reinvestigate the relationship between the debt and the macroeconomic indicators in Malaysia where they show that the existence of a long run relationship between external debt and the macroeconomic indicators in Malaysia. Their study indicated that there is short run connection running from CPI to External Debt.
Zakaria in 2102 studied the impact of trade openness on foreign debt in Pakistan. The study revealed a significant positive effect of trade openness on foreign debt.
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