Estimating the Optimum Level of Debt-Threshold: Empirical Evidence from Pakistan

Abstract

This study aims to determine the debt threshold of foreign debt and investigate the effectiveness of debt overhang effect beyond this threshold. ARDL model is framed within the structure of Solow growth model for estimating the coefficients of this model. Quadratic bivariate model is applied to determine the optimum level of debt-threshold. Different sort of diagnostic tests are also conducted in this study. Sample period is ranging from 1976-2020. This study finds that debt overhang is effective above the optimal level of foreign debt which is 26.4% of gross domestic product. Findings also depict that Pakistan is experiencing the debt-overhang effect since 1976 as the ratio of external debt-to-GDP has remained over and above the optimal level of debt across the sample. Since no government can avoid external borrowing completely, therefore this study recommends that government borrowing should be restricted to the optimum level of foreign debt. Similarly, efforts should also be made for downsizing the debt burden by utilizing the nondebt sources of finances like grants and revenues and that effective debt-management policies should be formulated for enhancing the economic productivity.

Research on differential game strategy of debt restructuring supported by government

“…Assume μ M and μ N respectively represent the effort cost coefficients of creditors and debt enterprises, C M ( t ) and C N ( t ) respectively represent the effort cost of creditors and indebted enterprises, which are convex functions of their respective efforts. In this paper, referring to the functional expression of reference [ 10 ], we set it as a quadratic function, that is, the functional expressions of both parties’ effort costs C M ( t ) and C N ( t ) are as follows: …”

“…Hypothesis 2: The level of efforts of creditors and debt companies has a positive impact on the synergies of debt restructuring, references [ 10 – 12 ], it is assumed that the synergistic effect decays with time, that is, there is a natural decay rate α and β are the influence coefficients of the debt restructuring efforts of creditors and debtor enterprises on the synergistic effect of debt restructuring, among α > 0, β > 0; γ is the natural decay rate of the synergistic effect, where γ > 0; K ( t ) represents the level of synergy between creditors and debt enterprises, where K (0) = K 0 ≥0 is the synergy of initial debt restructuring, the differential equation for the synergistic effect of debt restructuring is: …”

“…As an important economic activity, debt restructuring is one of the important means for enterprises to reduce financial risks and integrate social resources [ 8 , 9 ]. In recent years, the ratio of enterprises debt restructuring has shown a clear upward trend, which has aroused widespread concern in the economic community [ 10 ]. Nowadays, countries worldwide have completed a large number of debt restructuring based on the debt situation of non-performing assets of their enterprises.…”

“…The Finnish government rescued banks and enterprises through debt restructuring, supported the development of small and medium-sized enterprises through the stripping and selling non-performing assets of banks, and finally successfully got out of the debt dilemma of non-performing assets. In China, there are also many successful cases of enterprises successfully disposing of non-performing assets through debt restructuring [ 8 – 10 ]. In recent years, many important enterprises related to the national economy and people’s livelihood have been reborn through debt restructuring, such as Sanpower Group and Luckin coffee.…”

Waste as Resource for Pakistan: An Innovative Business Model of Regenerative Circular Economy to Integrate Municipal Solid Waste Management Sector

“…It is estimated that 1% increases in the external debt stock and debt serving are responsible for downsizing the economy by 0.2% and 0.13%, respectively [36]. The debt threshold level is between 15-30% of the GDP [37], while for Pakistan, the optimal level of foreign debt is 26.4% [38]. The current foreign debt of Pakistan is about 39.7% of the nominal GDP, which is 9.7% higher than the threshold level and 13.3% more than the optimal level (Figure 4).…”