An Empirical Analysis of Short Run and Long Run Association between Debt Servicing and External Debt in Pakistan
DOI:
https://doi.org/10.61506/01.00305Keywords:
External-debt, debt service ratio, fiscal deficit, ARDL, PakistanAbstract
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.
References
Afonso, A., Gomes, P., & Rother, P. (2011). Short‐and long‐run determinants of sovereign debt credit ratings. International Journal of Finance & Economics, 16(1), 1-15. DOI: https://doi.org/10.1002/ijfe.416
Ajayi, S. J. E. d., & Africa, c. f. i. s.-S. (2000). Macroeconomic approach to external debt: The case of Nigeria. 11-56.
Arsh, S., Batool, H., Liaqat, S., Gulzar, S., Shoukat, A., & Zafar, S. (2024a). Greening the Economy: Examining the Interplay of Green Finance, Financial Development, and Carbon Emission Reduction in OIC Nations. Remittances Review, 9(1), 1503-1535.
Arsh, S., Hussain, A., Iftikhar, S., Sarwar, J., Khalid, S., & Liaqat, S. (2024b). Integrated Analysis of Human and Physical Capital: Driving Forces of Economic Expansion in N11 Countries. Remittances Review, 9(2), 1824-1839.
Awan, A., Asghar, N., Rehman, H. U. J. A. J. o. B., & Research, M. (2011). The impact of exchange rate, fiscal deficit and terms of trade on external debt of Pakistan. 1(3), 10. DOI: https://doi.org/10.52283/NSWRCA.AJBMR.20110103A02
Awan, R. U., Anjum, A., Rahim, S. J. B. J. o. E., Management, & Trade. (2014). An econometric analysis of determinants of external debt in Pakistan. 5(4), 382-391. DOI: https://doi.org/10.9734/BJEMT/2015/8837
Beyene, S. D., & Kotosz, B. J. J. o. A. E. S. (2020). Determinants of external indebtedness in heavily indebted poor countries: An empirical evidence using panel-corrected standard error regression. 1(67), 229-242.
Beyene, S. D., Kotosz, B. J. S., & Economy. (2020). Macroeconomic determinants of external indebtedness of Ethiopia: ARDL approach to co-integration. DOI: https://doi.org/10.1556/204.2020.00013
Bunevich, K., Gulnara, A., Gavrilova, E. N., Shakizada, N., Olga, I., & Vladimirovich, V. V. (2020). External Debt Analysis and State of National Debt in the World Finance System. Paper presented at the IV International Scientific and Practical Conference'Anthropogenic Transformation of Geospace: Nature, Economy, Society'(ATG 2019). DOI: https://doi.org/10.2991/aer.k.200202.011
Carroll, J. J. A. J. o. E., & Development. (2013). A contribution to the foreign Debt and economic growth debate using Nigeria as a case study. 3(2), 48-54.
Chien, F., Chau, K. Y., Aldeehani, T. M., Huy, P. Q., Tan, L. P., Mohsin, M. J. E. C., & Restructuring. (2022). Does external debt as a new determinants of fiscal policy influence sustainable economic growth: implications after COVID-19. 1-21. DOI: https://doi.org/10.1007/s10644-021-09365-1
Çulha, A. J. C. B. R. (2006). A structural VAR analysis of the determinants of capital flows into Turkey. 2(2), 11-35.
Curtaşu, A. R. J. R. J. o. F. P. (2011). How to assess public debt sustainability: Empirical evidence for the advanced European countries. 2(2), 20-43.
Czerkawski, C., Czerkawski, C. J. T., & Economics, P.-O. A. o. t. E. D. (1991). Optimal and Non-Optimal Debt. 75-91. DOI: https://doi.org/10.1007/978-3-642-84549-9_5
Daniel, S. O., & Ibrahim, K. A. (2021). Fiscal Deficit and External Debt: The Nigerian Experience, International Journal of Development and Economic Sustainability. International Journal of Development and Economic Sustainability (October 29, 2021). International Journal of Development and Economic Sustainability, 9(3), 1-18.
Eng, P. V. d. (2024). Foreign debt will be Pakistan’s economic touchstone in 2024.
Ezike, J., Mojekwu, J. J. I. J. o. B., & Tomorrow, M. (2011). The impact of external debt on macro-economic performance. 1(2), 1-12.
Folorunso, B. A. J. J. o. E., & Studies, B. (2013). Relationship between fiscal deficit and public debt in Nigeria: An error correction approach. 5(6), 346-355. DOI: https://doi.org/10.22610/jebs.v5i6.410
Greenidge, K., Drakes, L., & Craigwell, R. J. J. o. P. M. (2010). The external public debt in the Caribbean Community. 32(3), 418-431. DOI: https://doi.org/10.1016/j.jpolmod.2010.02.004
Hasan, P., Chaudhri, F. M., & Ahmad, E. J. T. P. D. R. (1999). Pakistan's Debt Problem: Its Changing Nature and Growing Gravity [with Comments]. 38(4), 435-470. DOI: https://doi.org/10.30541/v38i4Ipp.435-470
Hung, L. D. J. J. o. I. C., Economics, & Policy. (2021). External debts and economic growth when debt rating matters. 12(03), 2150016. DOI: https://doi.org/10.1142/S1793993321500162
Insaidoo, W. G. B. (2017). Determinants of Short-Term Foreign Debt in Ghana: African Economic Research consortium.
Iqbal, F., & Nabi, I. (2024). Pakistan’s External Debt Dilemma.
Loser, C. M. (2004). External debt sustainability: guidelines for low-and middle-income countries (Vol. 26): UN.
Mohey-ud-Din, G. J. J. o. I. S., & Research. (2007). Impact of foreign capital inflows (FCI) on economic growth in Pakistan [1975-2004]. 5(1), 24-29. DOI: https://doi.org/10.31384/jisrmsse/2007.05.1.2
Naheed, Z., Nasreen, S., Tiwari, A. K., & Arsh, S. (2024). Analyzing the effectiveness of energy aid for driving the transition towards energy decarbonization; Evidence from Asian developing countries. Journal of Environmental Management, 360, 121125. DOI: https://doi.org/10.1016/j.jenvman.2024.121125
Nasreen, S., & Anwar, S. (2020). Energy efficiency and the role of financial development, trade openness and technological innovation: Exploring the dynamic linkages for Pakistan. DOI: https://doi.org/10.21203/rs.3.rs-84180/v1
Nkoro, E., Uko, A. K. J. J. o. S., & methods, E. (2016). Autoregressive Distributed Lag (ARDL) cointegration technique: application and interpretation. 5(4), 63-91.
Okeke, V. E., Nwakoby, C., & Okeke, N. E. (2022). Excessive internal borrowings and debt management: implications on the Nigerian economy. Journal of Financial Risk Management, 11(1), 116-141. DOI: https://doi.org/10.4236/jfrm.2022.111006
Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American statistical Association, 94(446), 621-634. DOI: https://doi.org/10.1080/01621459.1999.10474156
Qiu, Y. J. U. m. t., University Bielefeld, Germany. (2010). Debt Crisis and Debt Sustainability in Developing Countries.
Sa’ad, S. A., Umar, A. T., Waziri, S. I., Maniam, G. S. J. J. o. E., & Development, S. (2017). External debt burden and its determinants in Nigeria: An ARDL cointegration technique. 8(12), 31-37.
Stambuli, P. K. J. P. R. P. D. o. E. U. o. S. G. (1998). Causes and consequences of the 1982 world debt crisis. 3(2), 1-35.
Tille, C. J. A. a. S. (2005). The impact of exchange rate movements on US foreign debt.
Tiruneh, M. W. J. P. e. p. (2004). An empirical investigation into the determinants of external indebtedness. 3(2004), 261-277. DOI: https://doi.org/10.18267/j.pep.242
Umaru, A., Hamidu, A., & Musa, S. J. I. J. o. E. R. (2013). External debt and domestic debt impact on the growth of the Nigerian economy. 1(2), 70-85.
Wahid, A. (2023). Pakistan's Debt Dilemma.
Zafar, S., & Butt, M. S. (2008). Impact of trade liberalization on external debt burden: Econometric evidence from Pakistan.
