Assessment of Public Debt Sustainability Using Debt Dynamics Equation Approach:AComparative Study of Sri Lanka,India and Pakistan

Abstract

The enduring feasibility of government debt is a widely discussed issue that significantly affects the formulation of public policies. It has a critical impact on the fiscal development of a country, and it is an essential feature of well-established macroeconomic policy. This research focused on assessing public debt sustainability by using the debt dynamics equation modified by Chandia based on the original work of Romer. This research examines the sustainability of public debt in Sri Lanka, India, and Pakistan, focusing on the factors influencing variations in debt levels from 1990 to 2020. The initial section of the study highlights the factors that contribute to changes in debt stock. According to the analysis, the difference between the interest rate and growth rate, adjusted for the public debt stock, had a substantial effect on changes in debt levels in Sri Lanka, India, and Pakistan. Furthermore, the disparity between the primary budget balance and changes in reserve money negatively affected debt levels in both India and Pakistan. A separate annual sustainability assessment of public debt is performed for each of the three countries. The findings of the analysis are grounded in two conditions of debt sustainability. The study reveals that the countries in question have faced unsustainable or marginally sustainable debt levels for an extended period. It emphasizes the need for fiscal and monetary policymakers to intervene in order to establish sustainable public debt levels within these nations.