External Debt and Pakistan’s Economic Growth Trajectory: An Empirical Analysis

Abstract

Considering the unceasing rise in the stock of external debt for a developing country like Pakistan characterized by macroeconomic uncertainty and downwards tendencies, this particular research activity aims to scrutinize the dynamic connection between external debt and economic growth. The economic outlook and perspective of Pakistan is blemished by lack of economic governance, financial administration and hug state expenditure. The economy is a victim of rise and fall cycles and characterized by the downward trajectory by main economic indicators in the intermittent and sporadic periods growth followed by decline. External debt is the main obstacle and economic security issues which effect growth in the short as well in long run whose solution is vital for the economic resurgence. Excessive borrowing and lack of proper utilization of the borrowed money are the terms deeply associated with the inefficient use of foreign debt that effect the whole economic system of the country. ARDL model was employed for exploring long run cointegration among the selected variables. Data sources from WDI, IMF, SBP and other financial institutions covering the period from 1972-2023 were entertain to explore the impact among variables. ECM model for short run association along with different investigative assessments are applied. External debt and debt service payment posted a devastating and insignificant impact in short while in long run it posted negative and insignificant impact on growth variable. Foreign direct investment, human capital and labor force posted an encouraging impact. Broad money was positive but insignificant while exchange rate, inflation and gross capital formation are negatively but significantly correlated. The external debt burden coupled with debt service payment has a devastating impact of the economic growth of Pakistan confirming the existence of debt crowding and overhang dilemma. Policy maker should ensure proper management, monitoring system, reducing the misallocation and mis-utilization of external debt, encouraging foreign direct investment, increase productivity level, and attraction of foreign exchange reserves.