fiscal deficit and external debt driven external
TRANSCRIPT
Fiscal Deficit and External Debt Driven External Vulnerabilities
in South Asia: A Panel Data Analysis
John V. Guria
Reserve Bank of India
Disclaimer: The views expressed in the paper are those of the author and do not represent the views of the Reserve Bank of India.
Structure of PresentationObjective and Motivation of Study
Theoretical Frameworks
Brief Review of Literature
Stylised Facts
Empirical Estimation: Frameworks, Results and Analysis
Policy Implications
Concluding Remarks
2
Objective and Motivation
Objective: • Investigate the contribution of fiscal deficits in external vulnerabilities in
South Asia
Motivation: • Most of countries have persistent fiscal and current account deficits in South
Asia
• All South Asian countries are external indebted
• Countries with high external debt are more prone to external shocks thancountries with low external debt
3
Theoretical Frameworks Linkage between fiscal and current account balances:
X – (M + R) = S – I
CAB = (Sp – Ip) + (T – G)
(where, X = Exports of goods and services; M = Imports of goods and services; R = Net current account transfers and income from abroad; S = Domestic saving; I = Domestic investment; CAB = Current account balance: Sp = Private saving; Ip = Private investment; T = Government (tax) revenue); and G = Government expenditure)
Fiscal deficit → Current account deficit → External Debt
External debt dynamics:
dt = [1 + {(r – g – ρ(1 + g) + εα(1 + r))/(1 + g + ρ + gρ)}]dt-1 – nbt
(where, d = External debt to GDP ratio; r = Interest rate on external debt; g = Real GDP growth rate; ρ = Change in
US dollar GDP deflator (inflation rate); ε = Change in exchange rate defined as US dollar per domestic currency; α= Share of domestic currency-denominated debt in total external debt; and, nb = Non-interest current account balance and non-debt creating inflows as percentage to GDP)
4
Review of Literature
Dornbusch (1984): External shocks (such as oil prices, interest rate, global recession and fall in real commodity prices) cannot be responsible by themselves for the external indebtedness and debt crises of 1980s in the three major Latin American countries, viz., Chile, Argentina, and Brazil. In his words, “these external factors only had made much more apparent and unsustainable an underlying disequilibrium in which exchange rate overvaluation and/or budget deficits were perpetuated by continuing and excessive recourse to the world capital market.”
5
Review of Literature (concld.)
World Bank (1999): In the context of East Asian financial crisis of 1990s says that the main source of external vulnerabilities of East Asia was “a rapid buildup from the late 1980s onward of risky forms of leverage on the balance sheets of financial institutions and nonfinancial corporations, in particular, short-term foreign currency debt in excess of foreign currency resources available on short notice. Mismatches between the currency and maturity of liabilities and assets made firms vulnerable to sudden swings in international investors’ confidence and to the possibility of being unable to borrow from international capital markets to roll over short-term debt or meet other current debt service obligations.”
6
Stylised Facts
7
15
20
25
30
35
40
-1
0
1
2
3
4
5
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) External Debt/ GDP (Per cent) (rhs)
Per
cent
Per
cent
Chart 1(b) : Bangladesh - Fiscal Deficit and External Debt
-3
-2
0
2
3
5
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) Current Account Deficit/ GDP (Per cent)
Per
cent
Chart 1(a): Bangladesh - Fiscal Deficit and Current Account Deficit
25
45
65
85
105
125
-5
0
5
10
15
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) External Debt/ GDP (Per cent) (rhs)
Chart1(d): Bhutan - Fiscal Deficit and External Debt
Per
cent
Per
cent
-25
-15
-5
5
15
25
35
-5
-3
0
3
5
8
10
13
15
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) Current Account Deficit/ GDP (Per cent) (rhs)
Chart 1(c): Bhutan: Fiscal Deficit and Current Account Deficit
Per
cent
Per
cent
Stylised Facts (contd.)
8
10
15
20
25
30
35
4
6
8
10
12
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) External Debt/ GDP (Per cent) (rhs)
Per
cent
Per
cent
Chart 1(f): India - Fiscal Deficit and External debt
-3
-2
0
2
3
5
6
4
6
8
10
12
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) Current Account Deficit/ GDP (Per cent) (rhs)
Per
cent
Per
cent
Chart 1(e): India - Fiscal Deficit and Current Account Deficit
20
30
40
50
60
1
5
9
13
17
21
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) External Debt/ GDP (Per cent) (rhs)P
er
cent
Per
cent
Chart 1(h): Maldives - Fiscal Deficit and External Debt
-20
-10
0
10
20
30
1
5
9
13
17
21
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) Current Account Deficit/ GDP (Per cent) (rhs)
Per
cent
Per
cent
Chart 1(g): Maldives - Fiscal Deficit and Current Account Deficit
Stylised Facts (contd.)
9
10
20
30
40
50
60
1
3
5
7
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) External Debt/ GDP (Per cent) (rhs)
Per
cent
Per
cent
Chart 1(j): Nepal - Fiscal Deficit and External Debt
-8
-4
0
4
8
1
3
5
7
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) Current Account Deficit/ GDP (Per cent) (rhs)
Per
cen
t
Per
cent
Chart 1(i): Nepal - Fiscal Deficit and Current Account Deficit
20
30
40
50
60
2
4
6
8
10
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) External Debt/ GDP (Per cent) (rhs)
Chart 1(l): Pakistan - Fiscal Deficit and External Debt
Per
cen
t
Per
cen
t
-6
-2
2
6
10
2
4
6
8
10
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) Current Account Deficit/ GDP (Per cent) (rhs)
Per
cent
Per
cent
Chart 1(k): Pakistan - Fiscal Deficit and Current Account Deficit
Stylised Facts (contd.)
10
35
40
45
50
55
60
65
5
6
7
8
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) External Debt/ GDP (Per cent) (rhs)
Per
cent
Per
cent
Chart 1(n): Sri Lanka - Fiscal Deficit and External Debt
0
3
6
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Fiscal Deficit/ GDP (Per cent) Current Account Deficit/ GDP (Per cent)
Per
cent
Chart 1(m): Sri Lanka - Fiscal Deficit and Current Account Deficit
Source: World Bank; IMF; State Bank of Pakistan; Nepal Rastra Bank; Author’s calculations.
Stylised Facts (contd.)India, Maldives, Nepal, Pakistan, and Sri Lanka have persistently higher
fiscal deficits than Bangladesh and Bhutan
11
Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
Fiscal Deficit/ GDP (Per cent) 2.3 1.8 8.1 6.8 4.6 5.7 6.6
Current Account Deficit/ GDP (Per cent) 0.2 12.7 1.3 8.8 -0.6 2.5 3.8
External Debt/ GDP (Per cent) 27.0 65.1 21.8 32.4 38.0 39.0 50.0
Reserves/ Total External Debt (Per cent) 27.1 99.5 63.9 42.9 68.1 18.6 20.1
Short-term External Debt/ Reserves (Per cent) 19.6 1.6 26.8 37.4 3.8 81.0 55.8
Short-term External Debt/ Total External Debt (Per cent) 6.1 1.2 11.5 12.6 2.7 7.5 10.1
Net Foreign Assets/ GDP (Per cent) -24.2 1.4 -21.8 -46.2 -14.8 -34.1 -48.6
Debt Service Ratio (Per cent) 10.6 11.9 18.8 4.1 9.1 22.2 13.4
Key Indicators (1990-2017)
Vulnerability
Low High
Source: Author’s calculations based on data from World Bank, IMF, State Bank of Pakistan, Nepal Rastra Bank, and Lane and Milesi-Ferreti’s
“The External Wealth of Nations Mark II” database.
Stylised Facts (contd.)
12
Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
Fiscal Deficit/ GDP (Per cent) 3.4 0.7 7.1 6.6 3.8 5.3 5.9
Current Account Deficit/ GDP (Per cent) -0.6 26.4 1.3 11.8 -3.8 2.4 2.6
External Debt/ GDP (Per cent) 17.9 101.0 21.6 27.6 20.1 25.6 55.1
Reserves/ Total External Debt (Per cent) 65.5 58.4 73.6 50.1 169.0 24.3 17.1
Short-term External Debt/ Reserves (Per cent) 21.7 2.3 26.1 24.9 4.5 40.6 101.3
Short-term External Debt/ Total External Debt (Per cent) 17.1 1.1 19.0 10.0 8.1 9.4 16.5
Net Foreign Assets/ GDP (Per cent) -11.5 -41.5 -26.5 -84.3 11.4 -30.5 -55.3
Debt Service Ratio (Per cent) 5.4 13.6 13.0 3.3 8.6 18.1 22.0
Key Indicators (2013-2017)
Vulnerability
Low High
Source: Author’s calculations based on data from World Bank, IMF, State Bank of Pakistan, Nepal Rastra Bank, and Lane and Milesi-Ferreti’s“The External Wealth of Nations Mark II” database.
Empirical Frameworks
II) Regression of Current Account Deficit:
cad = f(fd, g, dep, opn, nfa)
Where,
cad = Current account deficit to GDP ratio (per cent);
fd = Fiscal deficit to GDP ratio (per cent);
g = Real GDP growth rate (per cent);
dep = Age dependency ratio (per cent);
opn = Trade openness; and
nfa = Initial (lagged) net foreign assets to GDP ratio (per cent)
13
Empirical Frameworks (concld.)
I) Regression of External Debt:
d = f(fd, g, def, r, sdd, rxr)
Where,
d = External debt to GDP ratio (per cent);
fd = Fiscal deficit to GDP ratio (per cent);
g = Real GDP growth rate (per cent);
def = Change in US dollar GDP deflator (per cent);
r = Interest rate on external debt (per cent);
sdd = Share of Short-term external debt in total external debt (per cent); and,
rxr = Real appreciation/depreciation of domestic currency
(i.e., rxr = ε – def)14
Graphical Analysis: Scatter Plots
15
R² = 0.7101
15
20
25
30
35
40
-1 -1 0 1 1 2 2 3 3 4 4Fiscal Deficit/ GDP (Per cent)
Exte
rnalD
ebt/ G
DP
(P
er
cent) r = -0.843
Chart 2(b): Bangladesh - Fiscal Deficit and External debt
R² = 0.195
-3
-2
-1
0
1
2
3
-1 0 1 2 3 4
Fiscal Deficit/ GDP (Per cent)Curr
ent
Account D
eficit/ G
DP
(P
er
cent)
r = -0.442
Chart 2(a): Bangladesh - Fiscal Deficit and Current Account Deficit
R² = 0.000
0
20
40
60
80
100
120
-5 -3 -1 1 3 5 7 9 11 13 15
Exte
rnal D
ebt/ G
DP
(P
er
cent)
Fiscal Deficit/ GDP (Per cent)
r = 0.002
Chart 2(d): Bhutan - Fiscal Deficit and External Debt
R² = 0.030
-20
-10
0
10
20
30
40
-5 -3 -1 1 3 5 7 9 11 13 15
Fiscal Deficit/ GDP (Per cent)Curr
ent A
ccount D
eficit/ G
DP
(Per
cent) r = 0.172
Chart 2(c): Bhutan - Fiscal Deficit and Current Account Deficit
Graphical Analysis: Scatter Plots
16
R² = 0.003
15
19
23
27
31
35
4 5 6 7 8 9 10 11 12Exte
rnal
Deb
t/ G
DP
(P
er c
ent)
Fiscal Deficit/ GDP (Per cent)
r = -0.053
Chart 2(f): India - Fiscal Deficit and External Debt
R² = 0.155
-3
-2
-1
0
1
2
3
4
5
6
4 5 6 7 8 9 10 11 12
Cu
rren
t A
cco
un
t D
efic
it/
GD
P (
Per
cen
t)
Fiscal Deficit/ GDP (Per cent)
r = -0.394
Chart 2(e): India - Fiscal Deficit and Current Account Deficit
R² = 0.285
0
2
4
6
8
10
12
14
16
18
20
20 25 30 35 40 45 50 55 60Ex
tern
al D
ebt/
GD
P (
Per
cen
t)
Fiscal Deficit/ GDP (Per cent)
r = 0.534
Chart 2(h): Maldives - Fiscal Deficit and External Debt
R² = 0.001
-15
-10
-5
0
5
10
15
20
25
30
0 2 4 6 8 10 12 14 16 18 20
Curr
entA
ccountD
eficit/ G
DP
(P
er
cent)
Fiscal Deficit/ GDP (Per cent)
r = 0.023
Chart 2(g): Maldives - Fiscal Deficit and Current Account Deficit
Graphical Analysis: Scatter Plots
17
R² = 0.140
10
15
20
25
30
35
40
45
50
55
60
0 2 4 6 8 10Exte
rnal
Deb
t/ G
DP
(P
er c
ent)
Fiscal Deficit/ GDP (Per cent)
r = 0.375
Chart 2(j): Nepal - Fiscal Deficit and
External Debt
R² = 0.288
-8
-6
-4
-2
0
2
4
6
8
0 3 5 8 10
Fiscal Deficit/ GDP (Per cent)Curr
ent A
ccount D
eficit/ G
DP
(P
er
cent)
r = 0.537
Chart 2(i): Nepal - Fiscal Deficit and Current Account Deficit
R² = 0.075
20
25
30
35
40
45
50
55
60
2 3 4 5 6 7 8 9 10Ex
tern
al D
ebt/
GD
P(P
er c
ent)
Fiscal Deficit/ GDP (Per cent)
r = 0.273
Chart 2(l): Pakistan - Fiscal Deficit and External Debt
R² = 0.111
-6
-4
-2
0
2
4
6
8
10
2 3 4 5 6 7 8 9 10
Curr
ent A
ccount D
eficit/ G
DP
(P
er
cent)
Fiscal Deficit/ GDP (Per cent)
r = 0.334
Chart 2(k): Pakistan - Fiscal Deficit and Current Account Deficit
Graphical Analysis: Scatter Plots
18
R² = 0.000
35
40
45
50
55
60
65
5 6 6 7 7 8 8 9 9
Exte
rnal
Deb
t/ G
DP
(P
er c
ent)
Fiscal Deficit/ GDP (Per cent)
r = -0.015
Chart 2(n): Sri Lanka - Fiscal Deficit and External Debt
R² = 0.008
0
2
3
5
6
8
9
5 6 6 7 7 8 8 9 9
Fiscal Deficit/ GDP (Per cent)Curr
ent A
ccount D
eficit/ G
DP
(P
er
cent)
r = -0.090
Chart 2(m): Sri Lanka - Fiscal Deficit and Current Account Deficit
Source: Author’s calculations based on data from World Bank, IMF, State Bank of Pakistan, and Nepal Rastra Bank.
Estimation: Results and Analysis (1)
19
Table 1: Regressions: Dependent Variable - Current Account Deficit (cad)
Pooled Fixed
Effects System-
GMM
cad(-1) 0.67*** 0.55*** 0.53***
fd 0.23 0.39* 0.47***
g 0.01 0.03 -0.07
dep -0.04 -0.07 -0.13**
opn 0.08*** 0.04 0.08
nfa(-1) 0.02 -0.02 0.05
Constant -0.14 2.04 6.48
R2 0.61
Within R2 0.44
Between R2 0.80
Overall R2 0.56
Arellano-Bond test AR(1) (p-value) 0.15
Arellano-Bond test AR(2) (p-value) 0.29
Countries 7 7 7
Observations 189 189 189
***, **, and * indicate significance level of 1 per cent, 5 per cent, and 10 per cent, respectively. Note: Robust standard errors were calculated for all regression models.
Source: Author’s estimates.
Estimation: Results and Analysis (2)
20
Table 2: Regressions: Dependent Variable - External Debt (d)
Pooled Fixed Effects
System-GMM
d(-1) 1.02*** 0.95*** 1.04***
fd -0.20 0.07 -0.16
g -0.17 -0.19** -0.23***
def -0.22*** -0.21*** -0.30***
r 0.31 0.40** 0.42
sdd 0.15** 0.19*** 0.41***
rxr -0.18 -0.15* -0.13
Constant -1.26 -0.40 -3.80*
R2 0.94
Within R2 0.87
Between R2 0.99
Overall R2 0.93
Arellano-Bond test AR(1) (p-value) 0.13
Arellano-Bond test AR(2) (p-value) 0.43
Countries 7 7 7
Observations 189 189 189
***, **, and * indicate significance level of 1 per cent, 5 per cent, and 10 per cent, respectively. Note: Robust standard errors were calculated for all regression models. Source: Author’s estimates.
Sensitivity Analysis
21
Table 3: Sensitivity Analysis of GMM
Robustness of Regressions of Current Account Deficit (cad)
cad(-1) 0.55***
fd 0.49***
g 0.16
dep -0.14*
opn 0.08
nfa(-1) 0.05
g2 -0.02
Constant 6.40
Arellano-Bond test AR(1) (p-value) 0.14
Arellano-Bond test AR(2) (p-value) 0.53
Countries 7
Observations 189
***, **, and * indicate significance level of 1 per cent, 5 per cent, and 10 per cent, respectively. Note: Robust standard errors were calculated for the regression model. Source: Author’s estimates.
Table 4: Sensitivity Analysis of System-GMM
Robustness of Regressions of External Debt (d)
I II
d(-1) 1.04*** 0.99***
fd -0.15 -0.07
g -0.21** -0.25***
def -0.30*** -0.20*
r 0.44 0.28
sdd 0.42***
rxr -0.13 -0.04
g2 0.00
str 0.04
Constant -4.00 0.55
Arellano-Bond test AR(1) (p-value) 0.14 0.11
Arellano-Bond test AR(2) (p-value) 0.44 0.33
Countries 7 7
Observations 189 189
***, **, and * indicate significance level of 1 per cent, 5 per cent, and 10 per cent, respectively. Note: Robust standard errors were calculated for all regression models.
Source: Author’s estimates.
Why no association between fiscal deficits and external debt despite “twin deficits” in South Asia?
22
0.0
20.0
40.0
60.0
80.0
100.0
Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
Net Equity Inflows Net Debt Inflows
Chart 3(a): Composition of Capital Inflows (Percentage share)
(1990-2017)
0.0
20.0
40.0
60.0
80.0
100.0
Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka
Non-concessional Debt/ Total External Debt (Per cent) Concessional Debt/ Total External Debt (Per cent)
Chart 3(b): Concessional Debt/ Total External Debt (Per cent)
(1990-2017)
Source: IMF; Author’s calculations. Source: World Bank; Author’s calculations.
Policy Implications
▪ Fiscal discipline – Fiscal consolidation (prudent fiscal management) – Implication for sustainable current account deficit/balance
▪ Reserves accumulation – Benefits [Qian and Steiner (2017)]: • Insurance and liquidity buffers against external shocks and financial crises
• Induces foreign capital inflows that reduce the vulnerability in the times of sudden stops or capital reversals
• Increases share of long-term external debt in total external debt, making the economy more resilient to shocks
• Enhances financial stability
▪ Real growth enhancing policies
▪ Preference of equity flows over debt flows
▪ Preference of stable flows over volatile flows
▪ Preference of long-term debt over short-term debt
▪ Productive utilisation of FDI – Enhancing exports earnings and debt repayment capacity
23
Concluding RemarksSri Lanka has lower reserves cover for total and short-term external debt, and
higher debt service ratio; while, Pakistan has lower reserves cover for total external debt and higher debt service ratio
The study finds “twin deficits” problem in South AsiaHowever, fiscal deficit does not significantly contribute in external vulnerabilities
in South Asia through external debtEquity capital inflows play important role in financing current account deficit in
Maldives, India, Pakistan, and Bangladesh; However, debt inflows are in form of concessional debt in all countries (except India), resulting in no significant association between fiscal deficit and external indebtedness in South Asia
Given the developmental needs of South Asian countries, current account deficit and external debt are not problems as long as they are sustainable
Policies should aim at increasing reserves cover for short-term and total external debt, real GDP growth, exports/ current account receipts, preferring equity flows over debt flows, long-term debt over short-term debt, stable flows over volatile flows, and productive utilization of FDI
24
Thank You!
25