PUBLIC DEBT AND ECONOMIC GROWTH: AN OPTIMAL DEBT THRESHOLD ANALYSIS FOR MALAWI

Abstract

This study investigates the threshold effects of public debt on economic growth in Malawi. This has been achieved using the time series from 1984 to 2022. By employing the Auto-Regressive Distributed Lag model and the Threshold Type Non-linear model, the study finds that the optimal threshold level for Malawi stands at 35% of Debt to GDP ratio. The study also finds that public debt has a negative effect on economic growth in the long run, a finding consistent with the classical economic theory that argues that public debt hampers economic growth. There is also evidence of the non-linear effect of public debt on economic growth in Malawi with low debt levels associated with positive impacts and higher debt levels dragging economic growth. The findings suggest that the current debt levels are highly above that optimal level and therefore deters economic growth in Malawi which stood at 0.9% as of 2022. The study, therefore, suggests that government should employ fiscal consolidation by reducing its spending on specific programmes with low economic gains. The study also suggests that government should promote growth-oriented policies and programs within the domestic revenue base as this will reduce the debt burden as a percentage of GDP. However, the study recognizes that a disaggregation on both domestic and external optimal debt levels will be ideal as the two main components of public debt are mostly used to service recurrent and development expenditure respectively. As such, they may have different effects on economic growth.