Effects of Oil Returns and External Debt on the Government Expenditure: A Case Study of Syria

Abstract

This study attempts to investigate the effect of oil returns and external debt on the government expenditure in Syria over the period 1970-2010. The Johansen cointegration test showed that oil returns and external debt have a positive and significant long run relationship with government expenditure. The Granger causality test indicates unidirectional short-run causality relationships running from oil returns and external debt to government expenditure. There are also unidirectional long-run causality relationship running from oil returns to government expenditure, and bidirectional long-run causality relationship between external debt and government expenditure. The IRFs indicate that when there is a shock to oil returns or external debt, the government expenditure will respond positively in the following years. The study result indicates that, oil returns have the biggest effect on the government expenditure, and both oil returns and external debt can play an important role in supporting the Syrian economy by financing the government expenditure.