Fiscal Devolution, Debt Sustainability, and Economic Growth: Evidence from Pakistan

Abstract

Subnational borrowing can jeopardize fiscal decentralization, whereas it strengthens efficiency in the public sector and economic growth. This research investigates the connection between fiscal decentralization, public debt, and economic growth during 1995-2022 for Pakistan. Basing research on ARDL bounds test for cointegration, FMOLS, DOLS, and ECM, we investigate results on a times series of datasets taken from WDI, IMF GFS, and SBP reports. These results indicate expenditure decentralization correlates negatively with lower public debt and deteriorates economic growth, whereas revenue decentralization increases GDP by 0.17%; thus, negative impacts are found on growth accruals of economic growth negatively impacted by a decrease of 0.03-0.12%, contrary to 90% GDP target threshold Replacing GDP, a 90% GDP threshold test negates impacts of growth on targets.