Effect of External Debt Services on Economic Growth: An Empirical Evidence from Pakistan
Abstract
The current study pursues to examine the impact of external debt servicing on the economic growth of Pakistan, spanning on the period from 1980 to 2022 (years). Time series data required for the study were sourced from the state Bank of Pakistan-SBP and world Development Indicators-WDI. To analyze the long and short term association of the variables GDP growth and external debt servicing, by applying the methodologies of Johansen Co-integration and Vector Error Correction Model (VECM). The econometrics findings approve the expected presence of the long run relationship among the variables, and revealing a negative association of external debt services, Interest rate with GDP growth. It indicates a potential debt-trap situation. Evidently, there is positive association between external debt servicing and gross domestic production in the short run, imputable to the injection of external debt into the economy. This incursion leads to increased investments, heightened economic activities, and a transient boost in GDP. The conflicting results between short and long-term perspectives emphasize the necessity for devising of policy for the policy makers.
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