External Debt and Economic Growth: A Case Study of Pakistan (1972-2021)

Abstract

Investment is crucial for maintaining the rate of economic growth in a nation. Many developing countries face economic problems due to low savings and investment. Pakistan, being a developing country, has been facing a budget deficit since its independence. Pakistan borrows loans from international institutions and other countries for smooth functions of its economy. Studies reveal that a significant portion of foreign reserves is utilized to pay external debt and interest on debt. Therefore, the main goal of this research is to examine how Pakistan's external debt affects economic growth from 1972 to 2021. Secondary data were collected from the World Bank. Unit root tests were applied to determine the stationarity of variables. Economic growth (GDP), external debt (ED) and debt services (DS) were stationary at first difference while imports trade (M), inflation (INF) and exports trade (X) were stationary at level. The Autoregressive Distributed Lag (ARDL) model is used to look at how dependent and independent variables are related over short and long time periods. The results show that foreign loans, exports and imports are positively related to economic growth, while an external debt service is inversely correlated. Inflation and economic growth are inversely connected. It is best for Pakistan to focus on exports, and external debt must be spent on developmental projects rather than non-developmental projects.