Public Debt and Low Interest Rates: Evidence from the Case of Morocco

Public debt is a critical topic in modern economic literature. The necessity for massive public investments and economic reforms encouraged countries to solicit important amounts of debt from the international market. The accumulation of high levels of public debt impacts the fiscal equilibrium in countries and affects the ability of the government to meet its responsibilities. Debt Sustainability Analysis is an approach to investigate the capacity of a country to service its debt without the need to incur major fiscal costs (increasing taxes or reducing expenses). The sustainability of the debt is closely related to the interest rate and the growth rate of the GDP. It can be measured by the debt to GDP ratio. This paper investigates the debt sustainability in the case of Morocco. The paper tries to analyze the impact of the interest rate-growth rate differential on the path of the public debt in Morocco. The particularity of this analysis is the use of the Tax Adjusted Interest rate, instead of the regular interest rate. Using the adjusted rate allows for the ability to take into account the tax collected by the government on T-bills which provides a more accurate determination of the cost of the debt. The paper shows, with empirical evidence, that the sustainability of the debt can be insured when the growth rate is higher than the Tax Adjusted Interest rate, even in the absence of a balance surplus. Countries can meet their debt service requirements without severe fiscal measures under two requirements: a high growth rate and a low interest rate. The conclusions of the paper constitute a source of information for policymakers, researchers, experts, and practitioners in the field of public debt. This study provides them with the required knowledge to manage public debt, make it more sustainable, and maintain financial stability. This study can also be a starting point for researchers desiring to analyze the efficient repartition of public debt among the economic sectors to ensure strong economic growth.