Impact of Debts on Economic Growth in Malaysia

Lim, Mei Sze (2019) Impact of Debts on Economic Growth in Malaysia. Masters thesis, UNIMAS.

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Abstract

Malaysian economy has experienced several financial crises. In addition, the policies implemented by the government to sustain economic growth have led to a budget deficit and a high level of debt. The ballooning effect of debts has raised concern on whether current debt levels could still be sustainable in the future to stimulate economic growth or will instead become a burden on the future generation. Hence, this study examines the impact of total debts at aggregate level, the national debt, and the external debt on Malaysia’s economic growth, respectively. This study adopted an Autoregressive-Distributed Lag (ARDL) model to estimate the impact of different types of debt on Malaysia’s GDP growth. The Threshold Autoregression (TAR) model was also used to determine the threshold value of national and external debts. The empirical findings indicate that total debts and national debt have a negative and significant impact on Malaysia’s GDP growth in the long run while the impact of external debt was found to be positive but insignificant in the long run. Meanwhile, the TAR model showed that the estimated threshold level for national debt and external debt was 68% of GDP and 38% of GDP, respectively. The empirical findings indicate that the impact of both national and external debts turned positive when the debt level was exceeded the estimated threshold level.

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