The The Diverse Impact of Domestic and Foreign Debt on Economic Growth: An Empirical Evidence from Pakistan

Abstract

The rate at which the Pakistani government has borrowed over the last several years is posing a serious threat to the national security. If the pace of borrowing remained unchecked, the size of the external debt, in particular, would become large enough for making it impossible for Pakistan to service its external debt obligations in an orderly manner. Therefore, this research has been initiated with the objective to examine the impact of both internal (domestic) debt and external debt on the economic growth of Pakistan. Time series data over period of 1970 to 2018, has been analyzed using ARDL (Auto Regressive Distributed Lag) technique of cointegration, Augmented Dicker Fuller test has been used to test the stationarity of series. Breusch-Pagan-Godfrey Test is used for checking heteroskedasticity and CUSUM test for checking stability. GDP (Gross Domestic Product) is used as dependent variable as a proxy for economic growth whereas, the explanatory variables include Domestic debt, External debt, Debt servicing along with FDI (Foreign Direct Investment) and Net National Income. The relationship between debt and economic growth was found to be inverse. The research also found that increasing foreign direct investment and national savings can boost the economy and reduce the negative burden of debt. The study suggest that Pakistan requires proper structured institutions and strong fiscal and monetary policies to overcome its debt burden. Pakistan needs reforms in its various sector. Pakistan should encourage exports and reduce its imports by developing local industries. The country should reduce the cost of doing business by providing energy at low rates, and reducing taxes. Attractive environment for foreign investments should be created in order to achieve success against the fight with debt.