Impact of Public Debt on the Economic Growth of Pakistan.

Naeem Akram


Over the years Pakistan has failed to collect enough revenues
for financing of its budget. Consequently, the problem of twin deficits
emerged and to finance the developmental activities government has to
rely on public external and domestic debt. The positive effects of
public debt relate to the fact that in resource-starved economies debt
financing if done properly leads to higher growth and adds to their
capacity to service and repay public debt. The negative effects work
through two main channels—i.e., ―Debt Overhang‖ and ―Crowding Out‖
effects. The present study examines the consequences of public debt for
economic growth and investment in Pakistan for the period 1972-2009. It
develops a hybrid model that explicitly incorporates the role of public
debt in growth equations. As the some variables are I (1) and other are
I (0) so Autoregressive Distributed Lag(ARDL) technique has been applied
to estimate the model. Study finds that public external debt has
negative relationship with per capita GDP and investment confirming the
existence of ―Debt Overhang effect‖. However, due to insignificant
relationships of debt servicing with investment and per capita GDP, the
existence of the crowding out hypothesis could not be confirmed.
Similarly, domestic debt has a negative relationship with investment and
per capita GDP. In other words, it seems to have crowded out private
investment. JEL classification: H63, O43, E22, C22 Keywords: Public
Debt, Economic Growth, Investment, ARDL

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