The Impact of Foreign Debt on Economic Growth: A case study of Pakistan

Abstract

Pakistan has depended much on foreign debt to manage its balance of payments deficit. The heavy dependence on foreign debt became uncontrollable in the late 1980’s. The main aims of this paper are to explore the impact of foreign debt on economic growth of Pakistan. To achieve this objective, data was collected from different sources for the period 1980-2021. The variables selected for this study included GDP per capita as dependent variable while foreign debt, foreign direct investment, gross capital formation and trade openness as independent variables. This study used statistical techniques such as ADF’s unit root test to check stationary, different outlier test are used to check outlier in the model. The study contains different techniques to verify autocorrelation, problem of heteroscedasticity, misspecification in the data and normality issue in error term. The results show that there is no autocorrelation, heteroscedasticity, misspecification and normality issue in error term. The study results show that foreign debt had adverse impact on GDP per capita while trade openness, gross capital formation and foreign direct investment had positive effect on GDP per capita during the period of this study. This study suggests that Pakistan must decrease foreign debt level and motivate natural resources and tax revenue, exports, efficiency and productivity.