The Impact of Public Debt on Economic Growth in the Republic of North Macedonia

Qendresa Rahmani
PHD Candidate, Faculty of Economic, SEEU, North Macedonia
DOI – http://doi.org/10.37502/IJSMR.2025.9105

Abstract

This study examines the relationship between public debt and economic growth in the Republic of North Macedonia over the period 2007–2021. In recent decades, public debt has become a central issue in macroeconomic policy, particularly following major economic shocks such as the global financial crisis and the COVID-19 pandemic. While public borrowing may support economic growth by financing productive investment and stabilizing aggregate demand, excessive debt accumulation can undermine long-term growth and fiscal sustainability. Using annual time-series data obtained from the World Bank, the International Monetary Fund, the National Bank of the Republic of North Macedonia, and the Ministry of Finance, this study applies an econometric model based on the Ordinary Least Squares (OLS) method. Economic growth, measured by GDP per capita growth, is specified as the dependent variable. Public debt, expressed as a percentage of GDP, and its squared term are included as key explanatory variables in order to capture potential nonlinear effects. Additional control variables include exports, final consumption expenditure, government expenditure, gross savings, and the current account balance.The empirical results provide evidence of a nonlinear relationship between public debt and economic growth. At relatively low levels, public debt has a positive and statistically significant impact on economic growth, whereas higher levels of public debt exert a negative and statistically significant effect. These findings support the existence of an optimal public debt threshold and highlight important policy implications for fiscal sustainability and debt management in developing and transition economies.

Keywords: Public debt, Economic growth, Debt threshold, Fiscal sustainability; North Macedonia.

References

  • Afonso, A., & Alves, J. (2015). The role of government debt in economic growth. Hacienda Pública Española / Review of Public Economics, 215(4), 9–26.
  • Baum, A., Checherita-Westphal, C., & Rother, P. (2013). Debt and growth: New evidence for the euro area. Journal of International Money and Finance, 32, 809–821.
  • Checherita-Westphal, C., & Rother, P. (2012). The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area. European Economic Review, 56(7), 1392–1405.
  • Égert, B. (2015). Public debt, economic growth and nonlinear effects: Myth or reality? Journal of Macroeconomics, 43, 226–238.
  • International Monetary Fund. (2013). Debt sustainability analysis. IMF Policy Paper. Washington, DC.
  • International Monetary Fund. (2022). IMF Data. Retrieved from IMF database.
  • Kumar, M. S., & Woo, J. (2010). Public debt and growth. IMF Working Paper, No. 10/174. International Monetary Fund.
  • Ministry of Finance of the Republic of North Macedonia. (2022). Public Debt Reports. Skopje.
  • National Bank of the Republic of North Macedonia. (2022). Annual Reports. Skopje.
  • Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics, 41, 21–41.
  • Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a time of debt. American Economic Review, 100(2), 573–578.
  • World Bank. (2022). World Development Indicators. Washington, DC.