An Empirical Assessment of the Dynamics of Public Debt and Economic Growth in Pakistan

Abstract

Public debt is affecting economic growth positively or negatively? A long debate about this particular issue exists. The present study examines the dynamics of foreign debt during 1972-2018 in the case of Pakistan to provide a sound working understanding of debt-growth nexus for effective debt management especially for developing countries like Pakistan. Data were taken from various issues of economic survey of Pakistan and World Development Indicators database. The study uses the ARDL model to gauge the long-run relationship between public debt, net exports, supply of money (M2), Investment, and GDP growth. Results show that foreign debt, the supply of money (M2) is affecting economic growth negatively but statistically significant. While net exports and investment are affecting GDP growth positively. For effective debt management, the foreign debt shall be used with proper care and this is the responsibility of the government to highlight the risk of foreign debt and the same may be used as a lender of the last resort, otherwise, it will put serious pressure on the scarce resources of an underdeveloped country like Pakistan.