External Debt Accumulation and Its Impact on Economic Growth in Pakistan

This study analysed the long run and short run impact of external debt on economic growth in Pakistan for the period 1970-2010 using annual data, collected from different sources. This study used the extended production function that measured Gross National Product (GNP) as a function of annual education expenditure (Proxy of human capital), capital, labour force and external debt as a percentage of GDP. Long run estimation employed a cointegration analysis while short run analysis relied on Error Correction Method (ECM).The estimated results indicated the external debt exerts significant negative impact on economic growth, this confirmed the existences of debt overhang in Pakistan in both long and short run. Labour force affect GNP negatively in long run and short run as well, but in short run impact is insignificant. However, human capital and capital contribute positively and significantly to GNP in long run and short run as well, yet the positive impact of capital exceed the impact human capital in long run and vice versa in short run. The coefficient of Error Correction Term (ECT) suggested that any deviation from the long term inequality is corrected by 33 percent over the each year. Significant ECT is further proof of the existence of stable long run relationship.