Investigating the Long and Short-run Dynamics between Public Sector Debt and Economic Growth (GDP Level): An Empirical Analysis of Saudi Arabia

Abstract

This dissertation aimed to scrutinise the long- and short-term dynamics among public sector debt and economic growth (i.e. GDP levels) in Saudi Arabia by analysing quarterly data from Q1 2015 to Q1 2024. The study applied three standard models (total GDP, oil and non-oil sectors GDP) utilising an autoregressive distributed lag (ARDL) methodology and controlling for other macroeconomic variables. The results revealed a long-term cointegration presence among public sector debt and economic growth in all models. The dissertation found a statistically positive inducement of public sector debt on total GDP growth in the long term and a negative short-term effect. In addition, a short-term negative effect of public sector debt on oil sector GDP growth was found, while no long-term statistically relevant effect was obtained. As for non-oil sector GDP, a statistically insignificant effect of public sector debt was found in the long term. The study also tested Granger causality and unveiled the existence of a predictive impact on public sector debt, with a mutual relationship between non-oil sector GDP and public sector debt.

This dissertation confirms a long-term balanced approach to managing public sector debt levels in Saudi Arabia. Maintaining sustainable positive long-term economic growth returns along with increasing borrowing levels might require constant observing of the public sector debt influences and the adoption of appropriate fiscal policies accordingly. In addition, this dissertation recommends monitoring short-term interactions and implementing proactive policies to avoid their implications on long-term growth. Likewise, predicting causality direction is significant for policymakers in Saudi Arabia by providing proactive insights aimed at designing effective economic and fiscal public debt-related policies.