How external debt led to economic growth in South Asia: A policy perspective analysis from quantile regression

Abstract

The study analyzes the relationship between external debt and economic growth in the South Asian region. The panel ordinary least square (OLS), fixed effect, Quantile regression, and robust output regression were used to analyze the World Bank data from 2000 to 2018. South Asian countries, Afghanistan, Bangladesh, Bhutan, India, Pakistan, Sri Lanka, Maldives, and Nepal, were included in the assessment. The analysis exhibited that external debt has a negative impact, and on the other hand, external debt stock has a positive impact on economic growth. The robust regression analysis substantiated the findings and yielded total external debt and external debt service impact of 39% and 31%, respectively. The study also showed that gross capital formation and trade openness have a positive effect on economic growth. Moreover, compared to domestic debt, Threshold analysis reveals that the external debt becomes a drag on growth and instigates a more substantial adverse effect on growth (due to the rising indebtedness of a country). Thus, the study serves as a base for policymakers and government officials to upsurge economic growth while reducing the foreign debt of the economy. Even though the presence of high borrowing costs, better institutional quality can help alleviate the adverse impact of external borrowing on growth.