Impact of Public Debt on the Economy in the Republic of Kosovo - Empirical Evidence

Author:Lumn? e Thaçi/Arbnora Gërxhaliu
Position:Faculty of Mechanical and Computer Engineering, Department of Economic Engineering, University of Mitrovica 'Isa Boletini', Kosovo/Candidate of the Society of Certifi ed Accountants and Auditors in Kosovo (SCAAK)
Pages:8-25
Vol
.
6
N
o
.
3
N
ovem
b
er, 2020
A
cademic Journal o
f
Business,
A
dministration, Law and Social Science
s
II
PCCL Pu
bl
is
h
ing, Graz-
A
ustri
a
ISS
N 2410-391
8
A
cces online at www.ii
p
ccl.or
g
8
Impact of Public Debt on the Econom
y
in the Republic of Kosovo - Empirical
v
nc
Prof. Ass. Lumn
ij
e Thaçi
Faculty o
f
Mechanical and Computer
E
ngineering, Department o
f
E
conomic
E
ngineering,
University of Mitrovica
"
Isa Boletini
"
, Kosovo
M
rs.
A
r
b
n
o
r
a
G
ë
rx
haliu
Candidate of the Society of Certi ed Accountants and Auditors in Kosovo
(
SCAAK
)
Ab
str
a
c
t
I
n addition to the various economic policies that governments use to achieve economic
objectives and increase social wel
f
are, public debt as a source o
f
nancing o
f
the state budget
is also used by governments o
f
di
erent countries. However, other macroeconomic indicators
h
ave a tremendous role to play in determining the level o
f
short-term and long-term debt or the
s
hare o
f
domestic debt and external debt. The aim o
f
this paper is to investigate the impact o
f
public debt on the economy o
f
the Republic o
f
Kosovo, using secondary annual data
f
rom 2009
-
2
019. Data analysis was per
f
ormed using multiple regression
O
LS (
O
rdinary Least Square).
T
he results o
f
the analysis con
rm that public debt has a positive but statistically insigni
cant
impact on t
h
e country's economy. Tota
l
d
e
b
t a
l
so
h
as a
l
ow positive corre
l
ation wit
h
GDP. T
h
is
researc
h
wi
ll
a
l
so ana
l
ysis t
h
e t
h
eoretica
l
an
d
empirica
l
l
iterature re
l
ate
d
to pu
bl
ic
d
e
b
t.
I
n
order
f
or the e
ect o
f
public debt to be higher on the economy and increase social wel
f
are, the
g
overnment must use these
f
unds productively to
nance various investment projects
.
K
e
y
wor
d
s
:
Public debt, external and internal public debt, short-term and long-term debt,
b
udget de
cit, economic growth.
1
.
I
ntr
odu
ct
io
n
O
ne o
f
the
p
roblems which is being
f
aced b
y
some countries in the management
of
the state budget is the high ex
p
enditure needs than state revenues.
I
n
f
act, the
m
ajorit
y
o
f
countries in the world would ado
p
t a de
cit budget
p
olic
y
, it means that
f
rom the outset o
f
the budget, state s
p
ending has been designed to be greater than
i
ts income. The conse
q
uence o
f
this budget de
cit is the creation o
f
the
p
ublic debt to
nance the state budget (Wibowo, 2017).
T
he rate o
f
countr
y
’s indebtedness is
p
roblems that are
f
acing man
y
growing nation
s
ince the beginning o
f
the 21st Centur
y
. There
f
ore increasing levels o
f
p
ublic debt
of
a countr
y
can be harm
f
ul to the growth o
f
the econom
y
o
f
an
y
countr
y
i
f
not
well utilized . Public debt can be classi
ed into di
erent t
yp
es such as long-term
d
ebt when the debt is ex
p
ected to last
f
or a longer
p
eriod o
f
time and short
-
t
erm debt i
f
debt is designed to last
f
or one or two
y
ears onl
y
. (Favor,
I
den
y
i,
O
ge, C
h
arit
y
, 2017). Pu
bl
ic
d
e
b
t can
b
e
d
ivi
d
e
d
by
b
orrower to externa
l
an
d
interna
l
d
ebt. The
f
ormer is based on a racting
f
oreign investors
f
or bu
y
ing government
i
ssued securities and borrowing
f
rom international
nancial institutions. The la er
Vo
l.
6
N
o
.
3
N
ovember, 2020
I
SSN 2410-391
8
A
cces online at www.ii
p
ccl.or
g
9
A
cademic Journal o
f
Business,
A
dministration, Law and Social Sciences
II
PCCL Publishin
g
, Graz-
A
ustria
c
omprises of borrowing within the country, using private banks and domestic
i
nv
e
st
o
rs
a
s
a
m
ai
n s
ou
rc
e
.
I
t
i
s h
a
rd t
o
d
e
t
e
rm
i
n
e
wh
i
ch
o
f th
e
s
e
i
s m
o
r
e
e
c
ie
nt.
E
xternal debt holds more risk, since it is hard to ne
g
otiate with
f
orei
g
n investors
f
or
b
e er terms in case o
f
debt crisis.
I
t also includes additional risks, such as exchange
rate risk, i
f
external debt is denominated in
f
oreign currenc
y
. Meanwhile, domestic
d
ebt gives an o
pp
ortunit
y
to substitute dela
y
o
f
re
p
a
y
ment with be er tax rates,
social guarantees.
I
t is considered to be sa
f
er, since domestic debt could be looked at
as a distribution o
f
assets amongst ones who has excess and those who need it inside
t
h
e countr
y
. However,
h
ig
h
d
omestic government
d
e
b
t ma
y
resu
l
t in re
d
uce
d
p
rivate
c
redit
ows. This would mean slower develo
p
ment on
p
rivate enter
p
rises and other
e
conomic initiatives. Conse
q
uent
ly
, it cou
ld
l
ea
d
to economic s
l
ow
d
own (Ri
b
eiro,
Vaicekauskas, Lakštutiené
(
2012
)
.
I
n the majorit
y
o
f
countries,
p
ublic debt is accumulating and is still considered as
a calamit
y
f
or macroeconomic stabilit
y
; in man
y
countries, es
p
eciall
y
the ones that
h
ave ex
p
erienced debt crisis, it causes
f
ear o
f
great disturbances and the breakdown
of
the state. However, due to a number o
f
advantages over taxes, countries
u
nwillingl
y
renounce debt as a source o
f
nancing, es
p
eciall
y
in
p
eriods o
f
extremel
y
h
igh, although short-term demand
f
or
p
ublic ex
p
enditures (wars, natural disasters,
e
conomic crises). The a raction o
f
debt on the one hand and the danger lurking as
a conse
q
uence o
f
excessivel
y
enjo
y
ing in the bene
ts o
f
the debt on the other hand,
re
q
uire constant caution and a ention when using this
scal
p
olic
y
instrument.
I
t was
this ver
y
necessit
y
o
f
rational debt management that stimulated economic science to
stud
y
the
p
ublic debt
p
henomenon, its causes and conse
q
uences, and to set o
p
timal
levels and sustainable boundaries of debt (Švaljek). Public debt is important as it may
yp p q p
a
ect monetar
y
p
olic
y
, the
p
olitical
p
rocess, the international level o
f
con
dence
f
or
the countr
y
, the ca
p
ital out
ows and asset re
p
lacement. Transmission channels to a
g
rowing (reduction) e
ect o
f
p
ublic debt on economic growth in the long term are: net
savings channel, the channel o
f
the cost o
f
debt service, and the channel o
f
national
c
on
dence level.
A
long the theoretical literature, regarding the contribution o
f
the
main economic schools on the relationshi
p
between
p
ublic debt and growth, we can
d
istinguis
h
two main grou
p
s.
O
n t
h
e one
h
an
d
, t
h
e
y
remain C
l
assics, Neoc
l
assics,
Ricardian view who consider
p
ublic debt as harm
f
ul to economic growth.
O
n the
o
ther hand, we have Modern economists, who see debt as a stimulant o
f
economic
g
rowth, but onl
y
i
f
the
f
unds are used
f
or
p
roductive
p
ur
p
oses. Se
p
aratel
y
these two
g
rou
p
s stands the Conventional view, which states that, in the short term
p
ublic debt
show a
p
ositive e
ect on economic growth, while in the long run it dis
p
la
y
s a negative
e
ect, which is transmi ed through reduction o
f
ca
p
ital and national income. (Lici,
Dika, 2016
)
.
Th
e increase
d
uncertainties in t
h
e externa
l
environment
d
uring t
h
e
y
ear 2019
d
i
d
not
a
ect the d
y
namics o
f
the domestic econom
y
o
f
the Re
p
ublic o
f
Kosovo, as real GDP
g
rowt
h
is estimate
d
to
h
ave mar
k
e
d
an acce
l
erate
d
growt
h
(4.2
p
er cent) com
p
are
d
to the
p
revious
y
ear (3.8
p
ercent). The acceleration o
f
economic growth came as a
result o
f
the
p
ositive contribution o
f
net ex
p
orts and investments, while the domestic
d
eman
d
mar
k
e
d
a
l
ower
p
ositive contri
b
ution com
p
are
d
to t
h
e
y
ear 2018. (c
h
art 5).
T
he d
y
namics in 2020 changed com
p
letel
y
, a
er the ra
p
id s
p
read o
f
the C
O
V
I
D-19

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