External debt growth nexus: Role of macroeconomic polices

This paper examines the impact of external debt on economic growth in Pakistan over the period 1970–2009. The empirical exploration of the impact of external debt on growth is analyzed allowing external debt to interact with macroeconomic policy index and considering the ratio of multilateral external debt to total external debt as an additional factor in the growth regression. The empirical analysis for the impact of external debt on growth is based on the ARDL approach to cointegration. The results show that external debt has a negative impact on growth, but this adverse effect can be reduced or even reversed in the presence of sound macroeconomic policy. Secondly, it is the bilateral and not the multilateral component of the total external debt that retards growth.