External Debt and Internal Debt Impact on the Growth of the Nepalese Economy

Abstract

The study examines the relationship between internal debt, external debt, and economic growth in Nepal. Debt plays a crucial role in capital formation that contributes to economic growth. Therefore, this study aims to examine the influence of internal and external debt on Nepal's economic growth between mid-July 1975 and mid-July 2022, utilizing the Ordinary Least Square method to determine the relationship between the variables, Augmented Dickey-Fuller techniques to test for unit root, and Granger causality test to establish causation between GDP, external debt, and internal debt. The unit root test results indicate that the GDP variable is stationary, while the variables of external and internal debt are non-stationary in the model. The causality results show a bidirectional relationship between external debt and GDP, but no causation exists between internal debt and GDP. The Johansen Co-integration test shows that there is no long-term correlation between external debt, internal debt, and GDP (Constant Price). This results in the null hypothesis of no co-integration being rejected and indicates that there is insufficient evidence to support the idea that external debt, internal debt, and economic growth (GDP) are co-integrated. Additionally, external debt does not Granger-cause internal debt, indicating a unidirectional relationship. The OLS results indicate that external debt has a negative impact on economic growth, whereas internal debt has a positive impact on the growth of the Nepalese economy (GDP). The findings of the study also suggest that external debt has a greater adverse impact on economic growth compared to internal debt. The study suggests that the government should prioritize the use of internal debt over external debt to foster economic growth in Nepal.