1. International Symposium on Financing for Development (ISFD2018) 
22-23 November 2018, Istanbul, Turkey
Determinants and Sustainability of External Debt: A Panel Data Analysis for Selected Islamic Countries
Abdul WAHEED
Associate Professor, University of Bahrain

2. Introduction
The main research objective of macroeconomic planning is to improve the standard of living of people through economic growth and development. Improved economic growth is possible through capital formation, which occurs from the investment. The investment is financed through saving.
Unfortunately, domestic saving is very low in most of the oil & gas importing Islamic countries. As a result, they mostly rely on foreign borrowing to finance investment. For oil & gas exporting Islamic countries, the government revenue collection is very low. As a result, in order to finance their development and non-development expenditures, they rely on foreign borrowing.
The continued reliance on foreign borrowing by oil & gas exporting and importing Islamic countries resulted in high external debt burden in these countries.

3. Introduction
Figure 1: Total Gross External Debt in Selected Islamic Countries (US$ Billion in 2017)

4. Introduction
The growing external debt burden of oil & gas exporting and importing Islamic countries is a constant source of concern for governments and policymakers of these countries.
The objectives of this study are twofold.
First, to identify the main determinants of external debt in Islamic countries. This study uses separate model for two group of countries because it is believed that the determinants of external debt in oil & gas exporting and importing countries cannot be all same.
Second, the estimated models are then used to analyse the sustainability of external debt for each country.

5. Theoretical Literature
This study is based on the two-gap model (Chenery and Strout, 1966) and the three-gap model (Bacha, 1990).
These models identified that developing countries often face a financing problem. For domestic investment and capital formation, developing countries need to raise funds through domestic financing or external financing.
The option for domestic financing is limited due to social, political and economic reasons. Therefore, they mostly rely on external finance, due to less crowding out effect on private investment and reduced risk of inflation in the economy.

6. Modelling Framework
According to the gap models, from the fiscal side, an increase in government expenditure or interest on debt requires external borrowing, whereas higher government revenue reduces the need for borrowing. From the current account balance side, the higher export of goods and services, and international reserve reduces the need for external borrowing while higher imports of goods and services require more external borrowing and ultimately result in accumulation of external debt.
Thus, the theoretical literature shows that government expenditure, government revenue, interest on debt, exports, imports, international reserve, and domestic investment are the main macroeconomic factors that affect external debt. The empirical literature identifies some additional factors such as inflation, FDI, Labour force, literacy rate, and domestic debt.

7. Modelling Framework

8. Modelling Framework

9. Data Sources
The study uses secondary data collected from World Development Indicators of the World Bank (2017) and Regional Economic Outlook of the International Monetary Fund (2017). The sample covers the time period from 2004 to 2016 and includes 10 oil and gas exporting Islamic countries and 9 oil and gas importing Islamic countries. The data on external debt, current account balance, foreign direct investment, gross capital formation, imports, central government expenditure, central government revenue are taken as a percent of GDP, whereas inflation is in percent and the other variables are in absolute term.

10. Model Estimation Results
Table 4.1: Macroeconomic Determinants of External Debt
Oil & Gas Exporting Islamic Countries
Oil & Gas Importing Islamic Countries
Variable
Coefficient
t-Stat.
Prob.
Constant
5.165
0.235
0.815
6.880
0.000
GDP
-0.109
-2.707
0.007
-0.204
-3.048
0.003
CGE
2.219
5.846
CGR
-2.995
-4.317
-1.625
-3.516
0.001
CAB
-1.684
-3.533
OPEN
1.267
3.961
FDI
2.085
2.952
0.004
INF
3.615
5.376
GCF
-1.146
-3.412
0.431
2.361
0.020
RES
1.821
7.013
-2.014
-2.709
0.008
TLF
-0.741
-2.270
0.025
TPOP
-1.037
-2.023
0.045
Adj.-R²
F-statistic
Adj.-R²
F-statistic
DW Statistic
Prob.(F-stat.) 0.00
DW Statistic
Prob.(F-stat.)

11. Model Estimation Results
Table 4.2. External Debt Sustainability of Selected Islamic Countries
Oil and Gas Exporters
2004
2006
2008
2010
2012
2014
2016
Algeria
0.492
0.868
4.963
8.224
22.765
16.006
1.759
Bahrain
1.501
0.474
0.590
1.022
0.681
0.616
0.000
Iraq
0.509
0.298
0.692
1.737
4.872
3.269
0.105
Kuwait
1.579
0.503
3.296
1.427
1.305
1.362
1.708
Oman
3.407
2.488
4.428
5.592
4.946
5.010
2.572
Qatar
0.897
1.532
0.624
0.834
0.562
0.543
0.605
Saudi Arabia
0.674
0.224
0.070
0.693
0.318
0.181
1.644
United Arab Emirates
2.244
0.742
2.119
1.572
1.787
2.027
Azerbaijan
0.276
4.465
10.374
3.226
1.828
3.523
3.645
Kazakhstan
0.558
0.411
0.874
0.418
0.251
0.322
0.471
Note: These figures are the ratio of estimated external debt to actual external debt

12. Model Estimation Results
Table 4.2. External Debt Sustainability of Selected Islamic Countries
Oil and Gas Importers
2004
2006
2008
2010
2012
2014
2016
Egypt
0.765
1.711
2.275
3.064
0.349
0.351
0.922
Jordan
0.716
1.787
2.618
3.283
3.516
1.186
1.276
Lebanon
0.615
0.537
0.677
0.988
0.985
0.996
1.031
Mauritania
0.589
1.429
0.509
1.006
0.933
0.890
Morocco
1.402
1.735
1.187
1.527
1.168
1.240
1.461
Pakistan
1.354
1.674
1.608
0.806
0.204
0.117
Sudan
0.436
0.878
0.732
0.706
1.139
1.000
1.275
Kyrgyz Republic
0.830
1.099
1.859
0.908
0.893
0.968
0.747
Tajikistan
1.659
1.971
1.343
1.301
1.303
0.705
Note: These figures are the ratio of estimated external debt to actual external debt

13. Conclusion
The first conclusion of the study is that the macroeconomic determinants and their effect on external debt in oil & gas exporting and importing Islamic countries are different. Therefore, the policymakers need to be careful while designing a debt reduction strategy based on macroeconomic variables.
The second conclusion of the study is that among oil & gas exporters, Bahrain, Iraq, Qatar, and Kazakhstan and among oil & gas importers, Egypt, Mauritania, Pakistan, Kyrgyz Republic, and Tajikistan accumulated more external debt than what is expected by the model based on their macroeconomic performance.

14. Policy Implications
The results of both models clearly identified that economic growth and central government revenue are important factors needs to be focused for reduction of external debt.
The policymakers should rely on external borrowing based on their macroeconomic performance.

15. Directions for Further Research
There is a need to extend this study to all Islamic countries.
In the extended sample we can further divide the countries on the basis of per capita income.
The extended sample of Islamic countries will help to identify remaining countries who accumulated more external debt than what is expected by their macroeconomic performance.

16. Questions and Comments
Thank You!
Questions and Comments