BACKGROUND sectors of most of the economies. A

BACKGROUND OF THE STUDYThe 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.

A World Bank report warns that Pakistan’s external sector situation could become unsustainable due to a lack of policy actions. In its twice-a-year South Asia Economic Focus (SAEF) report, the bank said that external account pressure has persisted in the fiscal year 2017-18. “The current external situation can become unsustainable in absence of adequate policy response,” warned the global lender. Pakistan is among the Highly Indebted Countries (HICs); because Pakistan’s present and future debt situation is very grim.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Countries resort to external debt due to various reasons such as financing development projects, meeting short term obligations, meeting long-term obligations, access to foreign currencies, buying of equipment etc. Whatever the reason or motivation is, the external debt so accumulated creates liability on part of the country to pay the amount. All of these transactions are maintained in the current and capital account of the country. Effects of external debt accumulation on investment and economic growth of the country are always remaining questionable for policymakers and academicians alike. There is no consensus on the role of external debt on growth.

It has both positive and negative aspect, different experts are in view that external debt will have favorable effect on economic growth because external debt will increase capital inflow and when used for growth related expenditures can accelerates the pace of economic growth. It will not only provide foreign capital for industrial development but will also give managerial know how, technology, technical expertise as well as access to foreign markets for the mobilization of a nation’s human and material resources for economic growth. On the other hand when external debt is accumulated beyond a certain limit, it will contract the economic growth by hampering investment. Pakistan usually takes loan in the form of dollars from IMF and USA and from the other countries. Pakistan has to pay that loan in the form of dollars. Pakistan current external debt is $88 billion. In 2016 the external debt of Pakistan was almost $73 billion.

The IMF is one of the few international agencies which are actively involved in the work of measuring and monitoring the external debt of the countries. The external debt of Pakistan increases at a rate of 7.6 percent annually. Almost every country in the world borrows the money from the other countries despite of this fact that the country is rich or not.

Because the world economies are interrelated with each other, sometimes it is much easier for a country to take an external debt from the other countries rather than take the loan domestically from the central bank of that country. Pakistan ranks at number 59th in the list of external debts by a country. In this study the focus is on finding the role of external debt in the economy of Pakistan. Pakistan is also ranked as the most developing countries in the world and Pakistan is one of the countries in the world that is facing serious external debt problems. These are the reasons for which the external debt of Pakistan is increasing day by day. There are different articles that are published to define the role of external debt in the economy of country.

Different researchers gain different types of data. Some researchers said that there is a negative relation of external debt towards the development of a country. While some researchers are of the view that the external debt provides the foreign capital for industrial development of the country. These contradictory results in literature were the basic motivation for this study to determine the effect of external debt on economic growth of Pakistan. The following Graphs show total external Debt of Pakistan, Gross fixed Capital and Real GDP growth.

source: SBP(2018)PAKISTAN’S GROSS CAPITAL FORMATION AND REAL GDP GROWTH TILL 2018 source: SBP (2018) source: https://tradingeconomics.

com/pakistan/external-debt: SBP(2018)LITERATURE REVIEW Bakar, N.A., et al. (2008) analyzed the effects of external debts on economic growth in Malaysia. The analysis was conducted both at aggregate and disaggregate levels. The empirical results were based on VAR estimates using GDP, external debts, capital accumulation, labor force and human capital. Estimation results at the aggregate level indicated that total external debts affect economic growth positively.

In particular, one percentage point increase in total external debts generates 1.29 percentage point of economic growth in the long term. Meanwhile, the positive effects of project loan has been detected at the disaggregate level. However, market loan had not shown any significant effect on economic growth. In the short-run, total external debts as well as project loan has positive effects on economic growth.Hassan and Butt (2008) investigated the determinants of economic growth for Pakistan over a period of 1975-2005. They applied ARDL approach to co.

Integration. The variables used were economic growth, trade, education and labor force. According to their study the results indicated no impact of external debt on economic growth where as economic growth can be accelerated through human resource development, education and trade openness via increased exports. Adesola (2009) investigated the impact of external debt administration installments on theEconomic growth in Nigeria by utilizing normal minimum squares various relapse strategies for his investigation. It was figured out that debt service payment have negative effect on growth of economy.

Atique, R., & Malik. (2012) explored the determinants of economic growth for Pakistan, the impact of domestic debt and external debt on the economic growth of Pakistan separately over period of 1980 to 2010, using Ordinary Least Square (OLS) approach to Co integration, Unit Root Testing, Serial Correlation Testing, test for checking Heteroskedasticity and CUSUM test of stability. The findings suggested an inverse relationship between domestic debt and economic growth and also the relationship between external debt and economic growth was found to be inverse. Lawrence, B.A., et al.

(2012) investigated the effect of the external debt burden on economic growth and development of Nigeria. It adopted regression analysis of OLS on secondary data sourced from CBN, Economical and Financial review, Business times, Financial Standard and relevant publication from Nigeria on variable like National Income, Debt Service Payment, External Reserves, Interest rate among others. The finding indicates that external debt burden had an adverse effect on the nation income and per capital income of the nation. High level of external debt led to devaluation of the nation currency, increase in retrenchment of workers, continuous industrial strike and poor educational system. Azam, M.

, Emirullah, C, et al. (2013) analyzed the impact of external debt on Economic growth of Indonesia. The method of Least Square has been used for Parameters estimation. The results revealed external debt has a negative Impact on Economic growth proving to be a burden rather than a blessing for the country. The finding also suggested importance of controlling External debt, public and private as well as enhancing debt management effectiveness. Sheikh, M.R.

, (2014) conducted research on the external debt sustainability analysis for the eight SAARC economies using the data from 2000 to 2013. Three types of techniques- univariate unit root tests, panel unit root tests and the co integration tests were applied. According to the first and second type of tests results, the external debt of SAARC economies was unsustainable individually but sustainable as a whole. The results of third type of tests revealed that the external debt of the SAARC economies was unsustainable individually and wholly with some exceptions.Zaman R & Arslan M (2014) determined the impact of external debt on economic development of Pakistan incorporating gross domestic savings, external debt, and gross fixed capital as explanatory Variables.

The findings showed that there is significant and positive effect of capital formation and external debt on GDP while gross domestic savings does not have any significant effect.Mahmoud LOM (2015) investigated the role of external debt on the economic growth of Mauritania. It applied various econometrics techniques such as unit root test, Ordinary Least Square (OLS); Johansen Co-Integration Test. OLS test indicates a positive relationship between the GDP and ED and negative relationship between GDP and DS. The Johansen Co-Integration Test revealed a negative relationship between GDP and ED and positive relationship between GDP and DS.

Hassan, B. et al. (2016) examined the impact of external debt to the growth and development of capital formation in Nigeria. Time series data was utilized for a period from 1980 to 2013, employing the Autoregressive Distributed Lag (ARDL) modelling. The ARDL estimation also showed the presence of long run relationship amongst the variables. It was also proved that the variables were independently related in the long run. The impact of external debt on capital formation has been established to be negative and statistically significant while savings came out as the only variable with a bidirectional causal relationship amongst the variables. Interest rate was found to be statistically significant even though weak.

OBJECTIVES OF THE STUDYThe research study has the following objectives:• To explore the impact of external debt on economic growth of Pakistan for a time period of 1986-2015.• To analyze short run and long run relationship among External Debt, GDP, Trade and Gross Capital formation for the time period of 1986-2015.• To suggest suitable policy recommendations.

HYPOTHESES TO BE TESTED• External debt does not affect the Economic growth of Pakistan for the time period of 1986-2015• There is no short run or long run relationship among External Debt, GDP, Trade, Gross capital formation. RESEARCH METHODOLOGYThe data is based on secondary source of data. The main purpose of the study is to analyze the impact of External Debt on the Economic growth of the country. Different time series econometric techniques are used to achieve the main objectives of the research.

The time-series data is from 1986-2015. The data is collected from secondary sources and World Development Indicator, (WDI). Four important variables are used to drive a model in order to study the impact of External debt on the growth of Pakistan’s economy. The variables used in this research paper includes, Gross fixed capital formation (GCF), External Debt (EDEBT) and TDE (TRADE) as independent variables while Gross Domestic product (GDP) has been used as dependent variable.

The econometric techniques applied are ADF test for stationarity, Granger causality test and JOHANSON co. Integration test for evaluating the short run long run relationship respectively. The methodology is described as the following: DATA DESCRIPTIONThe research study is based on annual data to analyze the relationship among different variables i.e. EDEBT, GDP, GCF, TDE, for the period of 1986-2015. The data for the variables has been taken from Economic survey of Pakistan, global economy, WDI (world development indicators.GDP = ƒ (EDEBT, TDE, GCF)MODEL SPECIFICATIONGDP = ƒ (Edebt, Gcf, Tde)Y = ?0 + ?1X1 + ?2X2 + ?3X3 + uECONOMETRIC EQUATION: Y (GDP) = ?0 +?1 (EDEBT) + ?2 (Tde) + ?3 (GCF) + uWhere, Y= Gross Domestic Product taken in (current US $)?0= Intercept?1, ?2, ?3 = Slope (respectively)X1= External Debt stock, taken as total (DOD current US $)X2= Trade; taken as totalX3= Gross fixed Capital formation; taken as %age of GDPU = error term JUSTIFICATION OF VARIABLESGDP: Gross domestic product is a measure that reflects the value of goods and services produced per individual in the economy in a given year and is measured in N’ Billion. It is used to capture economic growth and development in this study because it captures the total output produced by each individual in the country and as such provides a more accurate figure.

(Abula Mathew, 2016)EXTERNAL DEBT: External debt stock is used as a proxy for capturing total external debt of the economy in a given period. It is measured in N’ Billion. The priori expectation is a positive relationship between gross domestic product per capita and external debt stock, i.e. the higher the external debt Stock, the higher would be the level of gross domestic product per capita.

(Ahmad Naveed et al. 2014)FIXED CAPITAL: Assets or capital investments that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not used up in the actual production of a good or service, but have a reusable value. The priori expectation is a positive relationship between GDP and fixed capital. This variable has been employed by Zaman Rashid (2014)TRADE: Trade plays an important role in increasing the production of goods and services. Total trade is the sum of total exports and imports.

It is hypothesized that there exists a positive relationship between trade and economic growth. Hassan ; Butt (2008) has used this Variable along with external debt in their study. RESULTS AND ANALYSIS:ADF (AUGMENTED DICKY FULLER TEST)Stationarity of the variables or otherwise is determined by applying the unit root tests of the Augmented Dickey-Fuller (ADF) test. An ADF test examines whether a time series data has a unit root problem otherwise known as nonstationary or not. It was developed by Dickey and Fuller in 1976 and subsequently by Dickey and Fuller (1979, 1981) which resulted into the Dickey Fuller-test (DF-test).

DF-test is a one-sided test because of the alternative proposition or hypothesis that ? ; 0 (or ? ; 1). Stationary series should have zero means and constant variance. The null hypothesis, H0: ?=0 (i.e. the data is non-stationary or there is a unit root problem) and the alternative hypothesis, H0: ? 0.05) and significant (p


I'm Casey!

Would you like to get a custom essay? How about receiving a customized one?

Check it out