Remedial measures to sustain indebted economy: A time series analyses of Pakistan economy

Abstract

Most of the studies on the impact of debt on Pakistan economy are backdated to a decade and hence the need to re‐investigate the impact to ascertain the level of effect is encouraged. To investigate the target research, the neoclassical growth equation was expanded by augmenting the equation with other variables of interest (Trade openness and FDI) with the intent of proffering solution in reviving the economy via policy implication. Pakistan's annual data of 1970–2016 were estimated with ARDL and Granger causality approaches for both short‐ and long‐run effects. The main variable external debt is negatively and significantly related to Pakistan's GDP both in the short and long run; Trade openness has a positive and significant impact on the GDP; FDI also has a negative and significant relationship with GDP in the short run but a positive and significant impact on GDP in the long run; and investment has a significantly positive impact on GDP in the short run. Basically from the findings, it is observed that the debt swelling is of hurting effect to the economy. The policy implication should be framed around encouraging the trade openness, but with care, as the first lag is depicting negative impact, FDI must be encouraged with an eye on its long‐term impact on the economy and finally, investment should be given maximum attention in order to crowd out the effect of external debt in the economy.