Factors driving the gross public debt dynamics: The case of Republic of Macedonia
Journal
Journal of Contemporary Economic and Business Issues
Date Issued
2019
Author(s)
Abstract
The global financial and economic crisis has placed a significant strain on public
finances in many economies. Since sound public finances are crucial for price and
financial stability and for economic growth, concerns about rising debt commitments
have led to a renewed interest in the analysis of debt sustainability in the last decade.
This paper discusses the concept of fiscal sustainability and investigates the factors
driving the public debt dynamics in the Republic of Macedonia over the period 2004-
2021. Although the level of indebtedness is still moderate (below 50% of GDP), the
public debt dynamics from 2008 is worrying (public debt has doubled in only 7 years).
The starting point for assessing debt sustainability is the government budget constraint
equation. This equation explains the evolution and accumulation of government debt
by three main factors: the primary balance, the “snowball” effect, and the deficit-debt
adjustment. The conventional debt sustainability analysis showed that the general
government debt ratio over the period 2004-2017 increased moderately as a result
of a significant increase in the primary deficit (by 16 p.p.), that was almost completely
offset by the positive “snowball” effect. In addition, we found that in the pre-crisis
period (2004-2008), the general government debt ratio declined significantly, mainly
as a result of a positive “snowball” effect but also because of the primary surplus.
Contrary to pre-crisis developments, the general government debt ratio increased
significantly (by 19 p.p.) in the post-crisis period (2009-2017), due to the significant
primary deficit increase, while the positive “snowball” effect was moderate.
finances in many economies. Since sound public finances are crucial for price and
financial stability and for economic growth, concerns about rising debt commitments
have led to a renewed interest in the analysis of debt sustainability in the last decade.
This paper discusses the concept of fiscal sustainability and investigates the factors
driving the public debt dynamics in the Republic of Macedonia over the period 2004-
2021. Although the level of indebtedness is still moderate (below 50% of GDP), the
public debt dynamics from 2008 is worrying (public debt has doubled in only 7 years).
The starting point for assessing debt sustainability is the government budget constraint
equation. This equation explains the evolution and accumulation of government debt
by three main factors: the primary balance, the “snowball” effect, and the deficit-debt
adjustment. The conventional debt sustainability analysis showed that the general
government debt ratio over the period 2004-2017 increased moderately as a result
of a significant increase in the primary deficit (by 16 p.p.), that was almost completely
offset by the positive “snowball” effect. In addition, we found that in the pre-crisis
period (2004-2008), the general government debt ratio declined significantly, mainly
as a result of a positive “snowball” effect but also because of the primary surplus.
Contrary to pre-crisis developments, the general government debt ratio increased
significantly (by 19 p.p.) in the post-crisis period (2009-2017), due to the significant
primary deficit increase, while the positive “snowball” effect was moderate.
Subjects
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