The role of external debt in the sustainability of macroeconomic stability in Turkiye

External debt is a significant source of financing primarily used when domestic resources are insufficient to support a country's development and other needs. In Turkey, both the public sector and the private sector often resort to external borrowing for these purposes. Turkey's external debt has shown an increasing trend, especially since the early 2000s, with more pronounced increases in private sector external borrowing. The role of these borrowings in maintaining the stability of key macroeconomic variables such as economic growth, per capita GDP, inflation, current account balance, and budget balance has been a subject of debate. This study investigates the impact of public sector and private sector external borrowing on macroeconomic stability. In this context, the study graphically examines the relationship between public sector and private sector external debt stock/GDP and economic growth, inflation, unemployment, current account balance, budget balance, income distribution, and net exports for the periods 1970-1979, 1980-1989, 1990-1999, and 2000-2021 in Turkey. In the empirical part of the study for the period 1990-2021, the relationship between external borrowing (public-private) and macroeconomic stability was determined through time-series analyses using Autoregressive Distributed Lag (ARDL) methods and the Toda-Yamamoto causality test. The econometric model includes variables such as the macroeconomic stability index/risk, public external debt stock, private external debt stock, imports, and per capita GDP. The International Country Risk Guide (ICRG) method was used to create the economic stability index. The ARDL boundary test revealed a negative relationship between public external debt stock and economic stability in both the short and long term. In the long term, a one-period lag in private sector external debt stock positively affects economic stability. In the short term, however, it was found that a one-period lag in private sector external debt stock negatively affects economic stability. According to the Toda-Yamamoto causality analysis, a one-way causality relationship was identified from the economic stability index to private sector external debt and from per capita GDP to the economic stability index. No causality relationship was found between public external debt stock, imports, and the economic stability index.