An empirical assessment of fiscal sustainability for selected South Asian economies

Abstract

The paper examines sustainability of public finances for five major South Asian economies namely, India, Pakistan, Bangladesh, Sri Lanka and Nepal for period 1985-2014. The results of Gregory–Hansen (1996) and Carrion-i-Silvestre and Sanso (2006) tests confirm presence of long-run relationship between government revenue and expenditure for all the countries. The ARDL estimates of fiscal reaction function indicate positive long-run response of primary balance to rising public debt ratio in case of India, Bangladesh, Pakistan and Sri Lanka. The empirical results thus demonstrate coherence with intertemporal budget constraint for the countries. However, except for Bangladesh, sustainability exists only in weak form underscoring the need to reinforce commitments to long-term fiscal discipline.