Abstract
This research work seeks to examine a specific issue of the Algerian public debt sustainability using a nonlinear model approach. The results obviously indicate that the existence of threshold effects in the Algerian public debt depends on the sixth lag in oil price (US $ 80.85 per barrel). Thus, nonlinear unit root tests accept the null hypothesis of the unit roots; this intends to convey that the time series of public debt is not stationary and therefore cannot sustain the public debt in Algeria over the long term.
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Notes
MENAP oil exporters include: Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen.
Public entities include: Algérie Poste, local governments, and other public institutions. The government has an obligation to replenish the deposits used to finance the budget deficit, although there is no set timeframe.
Algeria created an oil stabilization fund (Fonds de Regulation des Recettes, or FRR) in 2000 to insulate the Algerian economy from volatility in hydrocarbon prices. There is a saving rule that stipulates that oil revenue is saved into the FRR above the oil price threshold of US$37 per barrel. The FRR was depleted in February 2017.
The central government also finances part of its deficit by using deposits from other public entities in the single treasury account “circuit du Trésor”. The government does not include such financing as public debt although, in essence, it incurs a liability.
The government issued bonds for about 9% of GDP to finance the purchase of debt owed by a utility company to a public bank and to compensate the state-owned oil company for losses incurred from selling imported refined fuel in the domestic market at subsidized prices. Debt figures including central government guarantees of 48% of GDP in 2017. Government guarantees consisted of guarantees of public enterprises’ borrowing from state-owned banks (21% of GDP in 2017).
The distinction between finite and infinite horizon will be important when it comes to defining the various sustainability indicators.
See Table 6 in appendix for strengths and weaknesses of each of the approaches.
Whether Zt is a strongly or weakly exogenous process, a necessary and sufficient condition for the transversality condition given by (9) to be satisfied is that, if Xt is structurally stable, then it should be a zero-mean stationary process.
This state dependent two regime process will imply that the further the fiscal balance deviates from the equilibrium, the faster will be the mean reversion.
For more details see: Chibi et al. (2014).
We refer to this test as the nonlinear augmented Dickey–Fuller (NLADF) test.
Hence, Sollis (2009) proposes a KSS-type test, which distinguishes between asymmetric or symmetric effects under the alternative hypothesis, i.e., the speed of mean reversion will be different depending on the sign of the shock and not only its size. He proposes to test for unit roots in this nonlinear framework using the auxiliary equation:
$$\Delta Y_{t} = \beta_{1} \,Y_{t - 1}^{3} + \beta_{2} \,Y_{t - 1}^{4} + {\text{error}}$$The null hypothesis of symmetric STAR versus the alternative of asymmetric STAR.
For more details about this method see the appendix in Chibi et al. (2014).
Total gross central government debt to GDP ratio annual data is gathered from: Carmen M. Reinhart website data (1964–1990), Trading economics website data (1991–2014) and Knoema website Data (2015–2016).
Crude Oil Prices quarterly data are compiled from: Federal Reserve Bank of ST. Louis and OPEC basket price.
Government public spending (% GDP) annual data are gathered from: Ministry of Finance, Quandl website data and IFS.
The results in this part were obtained with the JMulTi econometric package.
Number of delays seems logical considering that the search for a lender and debt deal arrangements are often exceed for 1 year.
The lags from 2 to 7 provided matrix inversion problem for the p values of F tests.
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Acknowledgements
We owe a huge debt of gratitude to: Timo Teräsvirta, Franses and van Dijk, Junsoo Lee, Aycan Hepsag and Sahnoune Nisrine, for providing JMulTi econometric package and the GAUSS, WinRATS code used in this paper.
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Chibi, A., Chekouri, S.M. & Benbouziane, M. Debt sustainability, structural breaks and nonlinear fiscal adjustment: empirical evidence from Algeria. Int Rev Econ 66, 369–397 (2019). https://doi.org/10.1007/s12232-019-00327-8
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DOI: https://doi.org/10.1007/s12232-019-00327-8