Can Emerging Countries Mitigate the Effect of Original Sin Problem in Achieving External Debt Sustainability

Abstract

Due to the spike in inflation, the implementation of easy monetary and
fiscal policies since the pandemic appears to be coming to an end. The
shift towards tighter policies raises concerns about debt sustainability in
developing countries, particularly due to the challenge of the “original sin”
problem. Given these premises, to analyze debt sustainability for emerging
countries, this study focuses on foreign exchange revenue capability and employs
external debt-creating (imports, reserves and interest payments) and reducing
variables (exports, reserve return and net transfers) for 1995-2020. The results
of this panel cointegration estimation for 15 EMDE countries are 0.74 and
0.70 for CCEMG and AMG estimators respectively which indicates moderate
sustainability as whole sample countries. However, the individual estimators
vary widely for each individual country from weak to strong sustainability.