Impact of Public Debt Burden on Economic Growth : Evidence from Bangladesh

Bangladesh is relying heavily on public debt to meet the budget deficit since its independence. In this paper, the objective is to find out whether the government of Bangladesh is excessively borrowing from the public sources and thus negatively affecting the economy of the country. For this purpose two models - Public Debt Model and Growth Model, have been used in this study. The Debt Model has been used to identify the nature and extent relationship of total public debt with the variables - total consumption, manufacturing sector growth, tax revenue, subsidy, net export and total government stock. In the Debt Model impact of domestic debt and external debt on the GDP growth rate of Bangladesh has been captured. The study period is 1980-81 to 2011-12. Augmented Dickey-Fuller test has been used to diagnose whether the time series data are non-stationary. Then on the basis of the result of Johansen co-integration test, Error Correction Model (ECM) and Vector Error Correction Model (VECM) have been used to find out the long term association between each set of variables. The study shows that a significant positive relationship exists between total public debt & investment and between total public debt & government’s reserves. On the other hand a negative relationship exists with manufacturing sector and government subsidy. However no strong statistical evidence has been found regarding the negative impact of external debt on the GDP growth. But with domestic debt it has been found negative relationship with little statistical significance