PUBLIC DEBT SUSTAINABILITY Evidence from Developing Country

This paper examines the debt sustainability issue in Pakistan by using the present value of budget constraint approach. Empirical results indicate that the series of government expenditure, revenue and discounted debt are non-stationary. The necessary conditions for debt sustainability are not met and debt has remained unsustainable throughout the period from 1971-2011. The debt reduction achieved in the early period of 2000s seems to be transitory in nature. It is also shown that the problem of debt sustainability stems from persistent fiscal indiscipline. The paper concludes that debt profile of the country will remain under pressure if a major correction in fiscal policy is not made.