Impact of Public Debt on Foreign Direct Investment: The Case of Albania

Public debt is a key macroeconomic indicator that shapes a country’s reputation. It remains a significant economic policy challenge for governments in less developed countries due to high debt levels. The aim of this paper is to investigate the relationship between Albania’s public debt and foreign direct investments (FDI). For that purpose, first a descriptive research design is employed and second the data are examined through VAR (Vector Autoregression) and Granger causality tests. The VAR autoregression results indicate that in the short term, public debt and FDI are not significantly correlated. In addition, the Granger causality tests reveal no significant causality between FDI and public debt or between exchange rates and public debt. However, there is a bi-directional causality between FDI and exchange rates. Policymakers should focus on debt management, economic openness, and infrastructure development to create a favorable environment for attracting foreign investment. The findings underscore the need for balanced fiscal policies to support long-term economic growth and investment stability.