The impact of government debt on the economic growth of Bhutan

Abstract

The study is motivated by the unprecedented increase in the level of government debt currently prevailing in Bhutan. An understanding of the relationship between government debt and economic growth is considered crucial. For this purpose, the study aims to empirically examine the relationship between the government debt and economic growth in Bhutan. To determine the relationship the data were obtained from different sources such as the World Economic Outlook (IMF), World Bank and National statistics Bureau of Bhutan. Time series data from the period 1990- to 2016 were fitted into the regression equation using various economic techniques. The result of Augmented Dicky Fuller (ADF) and Phillips Perron (PP) unit root test suggest that all the variables are non-stationary at level but exhibit stationary after the first difference. The Johansen co-integration test and Vector Error Correction Model (VECM) is employed to investigate the long run and short run effects of debt on real gross domestic product growth which has been used as a proxy of growth.

The result indicates that the government debt and tourism revenue has a positive long run impact on the growth of GDP whereas unemployment, foreign aid, tax revenue and population growth has a negative relationship with GDPG. The study also analysed the impact of rupee crisis on each variables and the impact on the economic growth as a whole. The study revealed that economic growth of Bhutan was greatly affected from the crisis which occured in 2012. The study recommends that Bhutan should minimize the dependency on debt and that the government need to further boost and pursue internal reforms and sources of revenues as a measure to finance its developmental activities.

Index Terms—Government debt, Economic Growth, co-integration test, vector error correction model.