The Impact Of External Debts On Pakistans Economic Growth Economics Essay

In developing states by and large the debt accumulates as domestic nest eggs are low and the payments shortages are high, hence import of capital is needed to use the domestic resources. Currently Pakistan ‘s economic system is unstable due to unsustainable external debts. Debt load is a great challenge for Pakistan ‘s economic status. To analyse the impact of debts we should detect the tendency in foreign debts. Therefore in this paper we will analyse impact of foreign debts on economic growing.


From late 1950s current history shortage was considered normal and it was a important beginning of income for developing states. There was an environment that encouraged developing states to borrow from foreign counties and international fiscal establishment to heighten the economic growing. But the other side of borrowing i.e. current liabilities was ignored that is the ground why today the development counties are confronting critical debt load. Pakistan ‘s economic system is confronting many challenges since 21st century, the greatest of which is to pay back the external debts. With the transition of clip the ratio of foreign debt is increasing. Developing states need loans to for addition in productiveness and economic development. Pakistan besides relies on foreign capital for economic and societal development. Pakistan ‘s entire debt reached to 115 % of GDP in 2001. It is the lone badly indebted low income state in South Asia. Harmonizing to IMF Pakistan ‘s projected external debt will be $ 75 billion in 2015. This projection has raised inquiry of debt default ensuing in decrease of investing.

Significance of survey

This paper will analyse the impact of foreign loans on economic growing of Pakistan. This survey will do the image clear of Pakistan ‘s debt degree for the investors.


This paper will be limited to the survey of impact of external debt merely on Pakistan ‘s economic growing.

Theoretical model

Shahrukh Rafi Khan in 1997 examined the footings on which Pakistan receives assistance and the impact of foreign assistance and debt on economic growing. By utilizing the Granger Causality trial he found negative impact of assistance and debt on3 GDP. In 1988 M.Aslam Chauduary worked on international debt and foreign dependence. He used the two spread theoretical account to place the demand for foreign loans. He found that if the adoptions of Pakistan continue so the state of affairs could be worse. In other words the per centums of debt outstanding, debt service and per capita debt outstanding will be more than the growing rate. M. Aslam Chaudhary and Anwar in 2000 studied Debt theory. They found that there are some phases of debt rhythm and harmonizing tothem in its firt phase state borrows loans, generates resources and takes base in the 2nd phase. But if it continues borrowing in the 2nd phase, it may hold excess and pay back the amount borrowed. They developed a debt theoretical account to analyse the debt theoretical account to analyse the debt cycle.Ishrat Hussain in July 2001 studied “ Pakistan ‘s development challenge ” by utilizing transverse sectional informations from 1990-2001 and her survey explains if merely public sector investing increases so it will decline the debt state of affairs. In 2001, Muhammad Aslam Chaudhary and Sabhat Anwas worked on “ Debts Laffer Curve for South Asiatic Countries ” . Harmonizing to them the rapid addition in external debts of developing states during 1970 ‘s had indicate the coming dangers of addition in involvement and amortization payment. Rehana Siddiqui and Afia Malik in 2001, worked on “ Debt and Economics growing in Asia ” . In this paper they analyzed the impact of lifting debts burden the impact of lifting debts load on economic growing of South Asiatic states. In instance of Pakistan, higher population growing rate of capital formation, and increase in debt load are the chief grounds for low rate of economic growing. Their consequences depict that debt indexs increased aggressively in 1990s, the population growing, misdirection of resources, loss of competition in international market and function of political groups contribute to heighten debt load. In 1997, Shahrukh Rafi Khan examined the footings on which that Pakistan receives assistance and whether its debts state of affairs is sustainable. He found that Pakistan is to a great extent in debt, and the altering footings of debt will do it hard for the state to acquire out of the debt trap. In 1999, Muhammad Ishfaq and M.A. Chaudhary in “ Fiscal Deficits and Debt Dimensions of Pakistan ” analyzed the financial shortage and debt of Pakistan. They found that financial shortage and shortages serve as cause and effects of eachothers. Their analysis based on the period from 1980-81 to 1997-98, shows that unless disciplinary steps are taken, the budget shortage is likely to lift. In January 2006, Abdul Waheed worked on “ Sustainability and determiners of domestic Public Debt of Pakistan ” he concluded his survey that domestic debts show that how much debt burden a state accumulates. In 2009 Imran Sharif Chaudhary, Shahnawaz Malik and Muhammad Ramzan worked “ Impact of foreign debt on nest eggs and Investment in Pakistan ” . They investigated the impact of foreign debt on nest eggs and investing in Pkaistan utilizing clip series econometric tools for the period 1973-2006. Harmonizing to the empirical consequences, there is no complete grounds that debts contribute favourably to the investing and nest eggs in Pakistan. They besides found that administration mechanism has a strong and important impact on nest eggs and investing. Nawaz Malik, Muhammad Khizar Hayar and Muhammd Umer Hayat worked on “ Empirical Debt and Economic Growth: Empirical grounds from Pakistan ” in 2010. They wrote that external debt is important beginning of income for developing states. They suggested that addition in external debt will worsen the economic system growing. As debt service tends to increase, there will be fewer chances for economic growing.


Many surveies have been done in order to understand the impact of foreign debt on growing. And every research worker who has worked on the relationship of debt and economic growing used different methods and variables. LS technique is used in this paper to analyse the impact of foreign debt on GDP growing in Pakistan.


Ho= Foreign debt has a negative impact on GDP growing in Pakistan from 1973 to 1997.

HA= Foreign debt has a positive impact on GDP growing in Pakistan from 1973 to 1997.

Data and Variables

For appraisal the information is used from the clip period 1973 to 1997 which has been taken from site Federal Bureau of Statistics, State bank of Pakistan and Economic Survey of Pakistan. To analyse the impact of foreign debt on growing I took five variables.





Labor is one of the factors of production. It is the step of work done by human being.

The information of labour was taken from universe resource institute.


Debts are a amount of money that is owed or due to paid because of an express understanding.

Debt information was taken from universe resource institute.

Debt service

It is the specific sum of money required for the refund of involvement and chief sum.

Debt service informations was taken from universe resource institute.


It is the addition in the capital stock, the purchase of fiscal merchandise or other points of value for future returns.

Investing informations was taken from ministry of finance of Pakistan.

Dependent Variable: GDP growing

Independent variables:



Debts Servicing


The dependant variable is used in the per centum. Independent variables are Debt is in million of dollars, debt service and investing is besides in million of dollars, labour is in 1000 of people. Independent variables were chosen to stand for the economic factors that affect GDP growing.


Relation With GDP

Debt service

It affects negatively in long tally which shows that addition debt service cut down economic growing because it cut down productive investing.


It has positive relationship with GDP. Labor increases economic growing and helps in debt service decrease.


It besides affect positively. It generate employment chances hence boost economic growing.


Reasonable degree of borrowing promotes economic growing through factor accretion and productiveness growing.


The theoretical account is with expected mark of the independent variables.

GDP growth= changeless +debts +labor -debt serving +investment


GDP=30900.96+0.473190debt+1.864529labour-1.335435debt servicing+0.004727i

S.E = ( 3786.8636 ) ( 0.158988 ) ( 0.177671 ) ( 0.629939 ) ( 0.004870 )

T ratios= ( -8.160043 ) ( 2.976273 ) ( 10.4942 ) ( -2.119943 ) ( 0.970802 )

R-Square= 0.998357

R-square Adjusted =0.998028

F-statistics=3037.861 Durbin-Watson statistics=1.168089

The research shows the important consequences of independent variables on GDP in Pakistan. The consequences depict that GDP growing and debt have positive relationship which shows that as the degree of debts increases the GDP besides increases through factor accretion and productiveness growing. Labor besides shows positive relationship with GDP growing which means as more labour plants in state it will heighten economic growing and will assist in debt services decrease. Debt service has negative mark which depicts that GDP will diminish as we have to pay back more.

Decision and Recommendations

The consequence depicts the positive effects of foreign debts on the economic development in Pakistan. Foreign debt, on the positive side helps in hiking the GDP growing through structural transmutation of the economic system. Proper use of foreign debts increases production through investing and these investings provide employment chances for labour.the positive relationship with investing depicts that it increase the income and domestic nest eggs which reduces the demand for foreign adoptions. When internal resources of the state are non utilised and managed in proper manner the state dependence on foreign assistance additions. In the long tally these debts hamper the economic growing because most of the part of the state ‘s net incomes is used in debt service which affect the GDP negatively. Debt has besides a negative consequence on labour productiveness and investing when the major part of production is used for debt service.

In this respect we would wish to state that there were merely inappropriate debt direction authorities ‘s policies which made the debt to work inefficaciously. Because policies besides plays an of import function in the effectivity of foreign debt, as assistance has more positive impact on the growing with good policies. On the other manus debt will non work efficaciously if the policies are hapless. Not merely good policies but the execution of these policies every bit good as the proper monitoring of debt use are really of import to avoid the hapless use and misdirection of foreign influxs.