Debt Sustainability: Economic Growth is the Panacea

PIDE Knowledge Brief No. 19:2020
Author: Abdul Jalil
Publication Year : 2020

Early development theory focused on the need for debt and foreign exchange, arguing that developing countries need external funds since they cannot generate adequate resources domestically to achieve economic growth to improve their livelihood. The borrowing addiction has led to repayment difficulties opening up concerns for debt sustainability. Therefore, the debt-growth nexus remains a widely discussed issue in the empirical literature. Mainly, Reinhart and Rogoff (2010) got colossal attention in this regard, which claimed that a debt to GDP ratio, which is higher than 90 %, negatively hurts economic growth. Though some research also challenges the Reinhart and Rogoff claim (2010).