External Debt Accumulation and Its Impact on Economic Growth in Pakistan

Abstract

The accumulation of external debt is common phenomenon of the developing countries and it has become a common feature of the fiscal sectors of most of the economies. A country with lower saving rate needs to borrow more to finance the given rate of economic growth. So external debt is obtained to sustain the growth rate of the economy, which is otherwise not feasible with the given domestic resources. Pakistan is one of the developing countries and faces serious debt problems, according to World Bank Report 2000-2001, Pakistan is among the Highly Indebted Countries (HICs); because Pakistan’s present and future debt situation is very grim. According to the World Bank total external debt may be defined as debt owed to non-resident repayable in terms of foreign currency, goods or services. External debt is the composition of long term debt (public and publicly guaranteed debt plus private non guaranteed debt), short term commercial debt and International Monetary Fund (IMF) loans. Prior to early 1970s the external debt of developing countries was primarily small and official phenomenon, the majority of creditors being foreign governments and international financial institutions offer loan for development project [Todaro (1988)]. At the same time current account deficit was common which increased the external indebtedness of the developing countries, until when Mexico, despite an oil exporter, declared in august, 1992 that it could not services its debt ever since, the issue of external debt and its servicing has assumed critical importance and introduced the debt crises debate [Were (2001)].

Determinants of External Debt: The Case of Malaysia

“…The hypothesis outlines that when the level of indebtedness is high, it discourages investment and adversely infleunces growth as prospective higher tax rates are set to repay the debt (Ali & Mustafa, 2012). Moreover, a high level of external debt increases a country's probability of default.…”

“…The lenders can be foreign governments, foreign commercial banks, or international financial institutions. External debt is composed of long-term debt that is guaranteed by public and private entities (some of which do not bear any guarantees), short-term marketable debt instruments, and and loans by multinations such as the IMF (International Monetary Fund (Ali & Mustafa, 2012)). Liabilities include both principal and interest.…”

“…However, it is also widely held that above a certain threshold of external debt can become detrimental to economic fundamentals, especially economic growth. In sum, sustainability of external debt and the consequences of accretion of external debt on economic growth and investment in a country are commonly lingering questions of concern for policymakers and academicians alike (Ali & Mustafa, 2012).…”

Long Run Association between Public Debt and Economic Growth in Sri Lanka

“…It is also important to select appropriate lag length. Harris and Sollis (2003) stated [18] two few lags would adversely affect the size of the test while too many…”

An Analysis of Exchange Rate, J Curve and Debt Burden in Pakistan: An Analysis of Bound Testing

“…Developing countries have the deficit in trade balance when they have local currency devaluated as a significant tools. The values of local currency into extend currency had been increase the price of local imports and decline in the price of external exports (Ali and Mustafa 2012).…”