An Empirical Analysis of Short Run and Long Run Association between Debt Servicing and External Debt in Pakistan

Saira Arsh, Javaria Sarwar and Sana Iftikhar
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Saira Arsh: Department of Economics, Lahore College for Women University Lahore, Pakistan
Javaria Sarwar: Assistant Professor, Department of Economics, Lahore College for Women University Lahore, Pakistan
Sana Iftikhar: Assistant Professor, Department of Economics, University of Education Lahore, Pakistan

Bulletin of Business and Economics (BBE), 2024, vol. 13, issue 2, 109-116

Abstract: Pakistan is at a crucial juncture where the escalating debt servicing cost of Rs 7.3 trillion is set to consume the majority of the projected revenue of Rs 9.2 trillion, which includes Rs 5.2 trillion allocated to the provinces. This study explores the interaction between debt servicing and external debt stock in Pakistan. It analyzes the impact of variables such as the debt service ratio, fiscal deficit, exchange rate, and globalization on external debt stock, using annual data from 1990 to 2020 obtained from the World Development Indicators (WDI) and the Pakistan Economic Survey. The stationarity of the variables is tested using the Augmented Dickey-Fuller (ADF) test. The Auto-regressive Distributed Lag (ARDL) bound test is utilized to investigate the long-term relationship among the endogenous and exogenous variables, and the Error Correction Model (ECM) is applied to study short-term dynamics. The findings indicate a negative long-term relationship between debt service and external debt, while fiscal deficit, exchange rate, and globalization show significant positive correlations with foreign debt. The study provides policy recommendations to alleviate the external debt burden.

Keywords: External-debt; debt service ratio; fiscal deficit; ARDL; Pakistan (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:rfh:bbejor:v:13:y:2024:i:2:p:109-116

DOI: 10.61506/01.00305

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