Debt Laffer Curve for South Asian countries

Abstract

This paper analyses the problem of rising debt burden of South Asian countries. Debt Laffer Curve is estimated to point out whether debt forgiveness or reduction in it will benefit the creditors and debtors. It has been pointed whether the debtors are on the wrong or right side of the Debt Laffer Curve. Moreover price elasticity of the market value of foreign debt is estimated, which is another way of looking at the benefits of debtor from a debt reduction scheme. The empirical estimated indicated that Pakistan, India, Sri Lanka and Nepal lie on the right side of the Debt Laffer Curve since their debt outstanding is below the level at which the market value of debt would be maximised. However, this value is not significant, which means that the growth of their debt outstanding is also alarming. It appears that they will soon reach on the wrong side of the Debt Laffer Curve. Maldives and Bhutan lie on the wrong side of the Debt Laffer Curve. The estimates of price elasticity equation indicate that these countries can gain from the debt written off. It appears that the level of foreign debt outstanding of South Asian countries is alarming and there is a need that these countries must pay appropriate attention for better management of their debt.