Fiscal Sustainability in Major South Asian Economies: Evidences from Panel Data Analysis

Abstract

The paper examines the issue of fiscal sustainability for a panel of five major South Asian economies namely, India, Pakistan, Bangladesh, Sri Lanka and Nepal, for the period from 1985-2014. The results of panel cointegration tests by Pedroni (1999) and Westerlund (2007) confirm the presence of a long- run relationship between government revenue and expenditure. The panel auto regressive distributed lag (ARDL) estimates of the fiscal reaction function indicate a positive long-run response of the primary balance to the rising public debt ratio, thus confirming fiscally responsible behaviour in the region. However, the size of the cointegrating slope parameter between revenue and expenditure obtained from the group mean fully modified OLS (FMOLS) and the group mean dynamic ordinary least squares (DOLS) is significantly less than one, indicating weak form of fiscal sustainability. The weak sustainability underscores the need for commitment to long term fiscal discipline and justifies the ongoing efforts by the South Asian countries to strengthen their fiscal positions.