Abstract
This study investigates the impact of external debt on the economic growth of Pakistan using annual time series data over the period 1976 to 2018. For this purpose, the syntheses of debt overhang and debt crowding-out hypotheses are examined within the framework of augmented Solow growth model. An autoregressive distributed lag (ARDL) model, Error Correction model and appropriate data diagnostic tests are applied. The empirical results indicate that external borrowing and debt servicing hamper the economic growth in Pakistan. Results reveal that 1% increase in stock of external debt is causing 0.20% fall in economic growth. Similarly,1% increase in debt servicing is causing 0.13% fall in economic growth. The findings of this study suggest that the policy makers should create a conductive environment for bringing increase in the level of domestic savings and exports, and should focus on increasing the inflow of capital through foreign direct investment and attracting the foreign exchange reserves. Incorporation of debt monitoring system along with its management is also required for minimizing the adverse effects of debt overhang and debt crowding out effects of the external debt. Keywords : External Debt; Economic Growth; ARDL; Pakistan JEL Classifications : F34, O11, C22, P24 DOI: https://doi.org/10.32479/ijefi.10134
Highlights
This study investigates the impact of external debt on the economic growth of Pakistan using annual time series data over the period 1976 to 2018
Counties who give effective response towards external borrowing in the form of deploying vide variety of policy approaches normally succeed to combat with the adverse effects of external debt
Countries who fail to meet their debt obligations suffer from severe macroeconomic imbalances in the form of high fiscal discrepancy, deterioration in foreign exchange reserves, fall in confidence of investors, instability in exchange rate and persistent fall in its credit rating by the international rating agencies (Economic Survey of Pakistan, 2007-2008)
Summary
This study investigates the impact of external debt on the economic growth of Pakistan using annual time series data over the period 1976 to 2018. Countries who fail to meet their debt obligations suffer from severe macroeconomic imbalances in the form of high fiscal discrepancy, deterioration in foreign exchange reserves, fall in confidence of investors, instability in exchange rate and persistent fall in its credit rating by the international rating agencies (Economic Survey of Pakistan , 2007-2008) It means that when the fund raisers failed to inject the borrowed money in the revenue generating and other productive projects, excessive borrowing leads to reduce the debt servicing and loan amortization abilities of the indebted country and creates obstacles in the path of getting sustainable economic growth and development in the long run (Abdelaziz et al, 2019). The Keynesian economists have considered its short run impact and have focused on policy prescriptive for combating with its Source: World Development Indicators (2020)
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