Relative impact of domestic and foreign public debt on economic growth in South Africa

Abstract

This paper investigates the nexus between public debt and economic growth by testing both the impact of aggregate public debt on economic growth, as well as the relative impact of domestic and foreign public debt on economic growth in South Africa – during the period from 1970 to 2017. The study utilises the autoregressive distributed lag (ARDL) technique to explain the underlying relationship between public debt (domestic and foreign) and economic growth. The empirical evidence from the study reveals that the impact of aggregated public debt on economic growth in South Africa is negative, both in the short run and in the long run. The results further reveal that the impact of disaggregated public debt on economic growth varies depending on the type of government debt and the time frame considered. Whereas domestic public debt is positively related to economic growth in the short run, the relationship is insignificant in the long run. Contrary, foreign public debt in South Africa is negatively associated with economic growth in the long run but is insignificant in the short run. In line with the empirical evidence, the study recommends that appropriate domestic public debt policies be pursued in South Africa, in order to improve economic growth. However, the study cautions the country against growing foreign public debt as this was found to have devastating economic growth consequences in the long run.