On public debt and twin imbalances in the South Asian region

Iwanthika Rajakaruna, Sandy Suardi and Nelson Perera

Applied Economics, 2021, vol. 53, issue 27, 3080-3096

Abstract: This paper studies the impact of a country’s public debt on its twin deficits. Using panel data of five South Asian countries characterized by acute twin deficits and a high debt-to-GDP ratio for 1980–2018, we find no evidence that the budget balance wields a statistically significant impact on the current account. When the relationship between fiscal and current account deficits is conditioned on public debt levels, we find a statistically significant non-linear twin deficits relationship. For low-to-moderate debt countries with debt ratios between 46.21% and 65.80% of GDP a fiscal deficit, increase leads to a lower current account deficit. For high debt countries (i.e. debt-to-GDP ratio is above 65.80%), a rising fiscal deficit results in a larger current account deficit. Maintaining a sustainable debt-to-GDP ratio of 65.80% or lower is crucial for reducing both fiscal deficits and current account imbalances.

Date: 2021
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DOI: 10.1080/00036846.2021.1875119

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