PhD, Economist/Middle Manager, Ministry of Finance, Kingdome of Morocco
Public debt is a critical topic in modern economic literature. The necessity for massive public investments and economic reforms encouraged countries to solicit important amounts of debt from the international market. The accumulation of high levels of public debt impacts the fiscal equilibrium in countries and affects the ability of the government to meet its responsibilities. Debt Sustainability Analysis is an approach to investigate the capacity of a country to service its debt without the need to incur major fiscal costs (increasing taxes or reducing expenses). The sustainability of the debt is closely related to the interest rate and the growth rate of the GDP. It can be measured by the debt to GDP ratio. This paper investigates the debt sustainability in the case of Morocco. The paper tries to analyze the impact of the interest rate-growth rate differential on the path of the public debt in Morocco. The particularity of this analysis is the use of the Tax Adjusted Interest rate, instead of the regular interest rate. Using the adjusted rate allows for the ability to take into account the tax collected by the government on T-bills which provides a more accurate determination of the cost of the debt. The paper shows, with empirical evidence, that the sustainability of the debt can be insured when the growth rate is higher than the Tax Adjusted Interest rate, even in the absence of a balance surplus. Countries can meet their debt service requirements without severe fiscal measures under two requirements: a high growth rate and a low interest rate. The conclusions of the paper constitute a source of information for policymakers, researchers, experts, and practitioners in the field of public debt. This study provides them with the required knowledge to manage public debt, make it more sustainable, and maintain financial stability. This study can also be a starting point for researchers desiring to analyze the efficient repartition of public debt among the economic sectors to ensure strong economic growth.
Keywords: Debt Dynamic, Debt Sustainability Analysis, Fiscal Balance, Interest Rate-Growth Rate Differential, Public Debt, Stata, Tax Adjusted Interest rate, Treasury Bonds.
JEL Classification: C87, E43, E62, H63.
Cite as: Eddassi, H. (2020). Public Debt and Low Interest Rates: Evidence from the Case of Morocco. Financial Markets, Institutions and Risks, 4(2), 98-107. https://doi.org/10.21272/fmir.4(2).98-107.2020.
- Aschauer, D. A. (2000, 2). Do states optimize? Public capital and economic growth. The Annals of Regional Science volume , 343-363. Retrieved from: https://ideas.repec.org/a/spr/anresc/v34y2000i3p343-363.html
- BANK, I. M. (2012). Revisiting the Debt Sustainability Framework for Low-Income Countries. Retrieved from: https://www.imf.org/external/np/pp/eng/2012/011212.pdf
- Bank, T. W. (2018). Debt Sustainability Analysis (DSA). Retrieved 04 2020, from The World Bank. Retrieved from: https://www.worldbank.org/en/topic/debt/brief/dsa
- Bank, W. (2005). Fiscal Sustainability in Theory and Practice. World Bank Publications. Retrieved from: https://openknowledge.worldbank.org/handle/10986/7495
- Blanchard, O. (2019, April). Public Debt and Low Interest Rates. American Economic Review , 1197–1229. Retrieved from: https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.109.4.1197
- Checherita-Westphal, C. (2019). Interest rate-growth differential and government debt dynamics. ECB Economic Bulletin . European Central Retrieved from: Bank.https://www.ecb.europa.eu/pub/economic bulletin/focus/2019/html/ecb.ebbox201902_06~0c96ee6f7c.en.html
- Checherita-Westphal, C., & Rother, P. (2011, 6). The Impact of Government Debt on Growth. An Empirical Investigation for the Euro Area. Revue économique, 1015-1029. Retrieved from: https://www.cairn.info/revue-economique-2011-6-page-1015.htm
- Clements, B., & Bhattacharya, R. (2014, 12). Quels sont les bienfaits de l’allégement de la dette? Finances & Développement. Retrieved from: https://www.imf.org/external/pubs/ ft/fandd/fre/2004/ 12/pdf/bhattach.pdf
- Feenberg, D., Tepper, C., & Welch, I. (2018, january ). Are Interest Rates Really Low? National Bureau of Economic Research. Retrieved from: https://ideas.repec.org/p/nbr/nberwo/24258.html
- Gunter, B. G. (2009). Towards an MDG-Consistent Debt Sustainability Concept. International Policy Centre for Inclusive Growth. Retrieved from: https://ideas.repec.org/p/ipc/opager/87.html
- Jérôme, O. (2012). Dette extérieure et qualité des institutions, impact sur la croissance économique : cas de l’UEMOA. Paris: ENSEA. Retrieved from: https://www.uneca.org/sites/default/files/uploaded-documents/AEC/2013/ dette_extrieure_et_qualit_des_institutions_impact_sur_la_croissance_conomique_ cas_de_l_uemoa.pdf
- Kazakova, S., & Inaba, K. (2018, 11). Debt Sustainability in the Developing Countries : Case Study of the Kyrgyz Republic. The Ritsumeikan Economic Review, 438-453. Retrieved from: https://www.semanticscholar.org/paper/Debt-Sustainability-in-the-Developing-Countries-%3A-Kazakova-Inaba/4b8928c11f349cebe16a260bbfafaf0e32b99113
- Krugman, P. (1988). Financing vs. forgiving a debt overhang. Journal of Development Economics , 253-268. Retrieved from: https://www.sciencedirect.com/science/article/abs/pii/0304387888900442
- Mehrotra, N. R. (2017). Debt Sustainability in a Low Interest Rate World. Hutchins Center Working Papers. Hutchins Center on Fiscal and Monetary Policy. Retrieved from: https://www.brookings.edu/wp-content/uploads/2017/06/wp32_mehrotra_debtsustainability.pdf
- Modigliani, F. (1961). Long-run implications of alternative fiscal policies and the burden of the national debt. Economic Journal, 730-755. Retrieved from: https://academic.oup.com/ej/article-abstract/71/284/730/5250136
- Mustapha, S. (2015). What does the latest literature say on the strengths and weaknesses of the IMF’s Debt Sustainability Analysis? Overseas Development Institute. Retrieved from: https://assets.publishing.service.gov.uk/media/57 a08999ed915d622c0002d5/What_ does_the_latest _literature_say_on_the_strengths_and_weaknesses_of_the_IMFs_Debt_Sustainability_Analysis.pdf
- Nissanke, M. (2013). Managing Sovereign Debt for Economic Development in Africa — A Critical Appraisal of the Joint Bank-Fund Debt Sustainability Framework and Its Implications for Sovereign Debt Management. London: School of Oriental and African Studies. Retrieved from: https://www.cigionline.org/sites/default/files/ documents/PB%20no.133_0.pdf
- Oddone, F. (2005). Still Missing the Point: Unpacking the new World Bank/IMF debt sustainability framework. EURODAD. Retrieved from: https://eurodad.org/uploadedfiles/whats_new/reports/eurodad %20wb% 20and %20imf% 20still%20missing%20the%20point.pdf
- Oks, D., & van Wijnbergen, S. (1995). Mexico after the debt crisis: is growth sustainable? Journal of Development Economics, 155-178. Retrieved from: https://econpapers.repec.org/article/eeedeveco/ v_3a47_3ay_3a1995_ 3ai_3a1_3ap_3a155-178.htm
- Ouedraogo, J. (2012). Dette extérieure et qualité des institutions, impact sur la croissance économique : cas de l’UEMOA. ENSEA. Retrieved from: https://www.uneca.org/sites/default/files/uploaded-documents/AEC/2013/dette_extrieure_et_qualit_des_institutions_ impact_sur_la_croissance_ conomique_cas_ de_l_uemoa.pdf
- Panizza, U. (2008). Domestic and External Public Debt in Developing Countries . Un. Retrieved from: https://debt-and-finance.unctad.org/Documents/Discussion-papers/Domestic_and_External_Public_Debt_in_ Developing Countries_ PANIZZA_2008.pdf
- Reddy, M. (2006). Assessing Sustainability of Fiji’s Public Debt: A Cointegration Analysis Approach. Economic Association of Fiji. Retrieved from: http://www.rbf.gov.fj/docs/Spch%20by%20Dr% 20Mahendra%20Reddy% 20at%20Eco%20Assoc%20Forum%20RBF_01mar06.pdf
- Riegner, M. (2014). Legal Frameworks and General Principles for Indicators in Sovereign Debt Restructuring. UNCTAD. Retrieved from: https://cpb-us-w2.wpmucdn.com/campuspress.yaleedu/ dist/8/1581/files/2016/10/I-Riegner-Special-Edition-2m1p10b.pdf
- Terry, R., & Maana, I. (2014). An Assessment of Kenya’s Public Debt Dynamics and Sustainability. Retrieved from: https://www.semanticscholar.org/paper/An-Assessment-of-Kenya-%E2%80%99-s-Public-Debt-Dynamics-and-Ryan-Maana/739a3b6cce03db94dc9032f22bb4eb489af76b0e
- Westphal, C. C. (2019). Interest rate-growth differential and government debt dynamics. ECB Economic Bulletin. European Central Bank. Retrieved from: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2019/ html/ecb.ebbox201902_06~0c96ee6f7c.en.html
- Wyplosz, C. (2007). Debt Sustainability Assessment: The IMF Approach and Alternatives. Geneva: Graduate Institute of International Studies. Retrieved from: https://ideas.repec.org/p/gii/giihei/heiwp03-2007.html