Public Debt Trap Conundrum: Exploring the Threshold Level for Optimal Public Debt in Middle East and North African (MENA) Countries

The vicious circle of public debt i.e. borrowing, debt servicing, and further borrowing for debt servicing has become a major impediment to economic growth and stability for developing countries. The instant study addressed the major knowledge gap regarding a clear understanding of the optimal level of public debt for 19 countries of the Middle East North African (MENA) region. For this purpose, panel data was derived from the World Bank. The participant variables of Central Government debt, debt square, total population, tax revenue, primary school enrolment, Gini coefficient, and per-capita income were analyzed by applying fixed effect regression with Driscoll-Kraay standard errors method. The results exhibited an inverted U-shaped association between per-capita income and public debt. The optimal threshold of public debt after which per-capita income began to decrease was found to be approximately 43,673.17 million (LCU). The income inequality was negative while tax revenue and primary school enrolment were positively and significantly associated with per-capita income, meanwhile, the population was found to be insignificant. It was concluded that the MENA countries must control their public debt and should not go beyond the threshold level in order to increase economic growth. Further, income inequality should be decreased to increase the per-capita income along with an enhanced focus on increasing tax revenue and education level.