The effect of external debt in the economic growth of Pakistan

In this study we examine the effect of external debt with the economic growth of Pakistan. External debt is a debt which is held by the creditors of foreign countries in the world. Time series data is collected from the World Bank site for the last thirty years ranges from 1986-2015. Statistics analysis and ordinary least square regression is performed through a descriptive statistical table. To check the relationship between economic growth and external debt OLS model is used. GDP is our dependent variable. Gross domestic saving, gross capital formation and external Debt stock is our independent variable. The results show that the huge amount of number of GDP of country is backed by external debt. Introduction External debt is known as foreign debt. External debt is a kind of debt which is held by the creditors of foreign countries of the world. These are the debts that including the interest, this is the interest must usually be paid in the currency in which the loan was made. Pakistan usually takes loan in the form of dollars from IMF and USA and from the other countries. Pakistan has to pay that loan in the form of dollars. Pakistan current external debt is $56 billion. In 2012 the external debt of Pakistan was almost $54 billion. The IMF is one of the few international agencies which are actively involved in the work of measuring and monitoring the external debt of the countries. The external debt of Pakistan increases at a rate of 7.6 percent annually. Almost every country in the world borrows the money from the other countries despite of this the country is rich or not. Because the world economies are inter related with each other. Sometimes it is much easier for a country to take an external debt from the other countries rather than take the loan domestically from the central bank of that country. Pakistan ranks at number 59 in the list of external debts by a country. In this article we will able to find the role of external debt in the economy of Pakistan. Pakistan also ranked as the most developing countries in the world and Pakistan is one of the countries in the world that is facing serious external debt problems. Pakistan is taken loan from IMF and other banks for various reasons. Such as developing projects in country, buying of different types of equipments from other countries, meeting the long term and as well as short term liabilities. These are the reasons for which the external debt of Pakistan is increasing day by day. Role of external debt in any country has no consensus. There are different articles that are published to define the role of external debt in the economy of country. Different researchers gain different Journal for Studies in Management and Planning Available at http://edupediapublications.org/journals/index.php/JSMaP/ e-ISSN: 2395-0463 Volume 02 Issue 1 January 2016 Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 84 types of data. Some researchers said that there is a positive relation of external debt towards the development of a country. Some researchers said that the external debt providing the foreign capital for industrial development of the country. Problem Statement External debt of Pakistan: The external debt of Pakistan is $52.43 billion. Pakistan is in the 59 number in the list of external debts by a country. Pakistan external debt is increasing day by day. Every Pakistani having a liability of about 66,000 pkr. The external debt of Pakistan increases at a rate of 7.6 percent annually. Pakistan has recently taken a loan from IMF which definitely increases the debt of the country. External debts of other countries: USA is a country having more external debt than other countries. USA is currently having a external debt of US$15680 Billion. Ranks first in the list made by the World Bank. UK is having a debt of US$6977 Billion. Which is came after USA in the World Bank list. India is currently having a external debt of US$412.2 Billion and ranks 28 in the list. How Pakistan can reduce its foreign debt: There are many ways in which Pakistan can reduce its foreign debt. The first and better way is that Pakistan has to reduce its imports and balance of payments and should establish the resources to promote the exports. Pakistan can reduce its debts by paying the debt. Objectives The objective of this research is to find out the positive and negative effect of external debt towards the economy of Pakistan. Objective is to find weather external debt increases capital inflow of the country or not. Objective is to find out the reasons why external debt is taken. Literature Review There are a large number of studies which have been conducted by the different economists and the researchers having a goal to check that either the external debt effect the growth of the country or not. The economists and researchers apply different techniques and methods to find the relationship. They have find mixed relationship and conclude different results, the studies of the researchers shows that external debt affect the growth of the country significantly while on the other hand some researchers are failed to draw the same result. Researchers used different type of variables to conclude the effect of external debt to the growth of the country. Some of the conclusions made by the researchers are given below: (Arshad, Aslam, Fatima, & Muzaffar, 2015) has conducted a research to investigate whether the foreign debt lead the economic growth of the country in the longer run or not. In regard to this a time series data from 1970-2014 are taken and ordinary least square method is used in this regard. (Lee & Ng, 2015) Has conducted o study to check whether the variables such as external debt and budget expenditure having an Journal for Studies in Management and Planning Available at http://edupediapublications.org/journals/index.php/JSMaP/ e-ISSN: 2395-0463 Volume 02 Issue 1 January 2016 Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 85 impact on economic development. A data from 1971-2003 is taken and the results shows that there is a negative of public debt on Gdp. (Zafar, Sabri, ilyas, & kousar, 2015) has conducted a study to investigate whether the external debt is having a positive impact on economic growth or not. Unit root test has been applied and the results show that there is negative impact of external debt in economic development of a country. (Emori, 2015) Has conducted a study to examine the impact of the external debt on the economic growth of Nigeria. The co integration method is used and the results show that impact of external debt having a positive impact on economic growth of Nigeria. (alin & bedir, 2015) Has conducted a study and the study aims to check the role of external debt on the economic growth and date from 1985-2013 has been taken and the results shows that there is negative impact of external debt in the economic growth of a country. (hussain, haque, & IGWIKE, 2015) Has conducted a research to find that is debt is a burden for economic growth and the data from 1995-2012 has been taken and garner causality test is applied and the results shows that there negative correlation between the gdp and debt. (Mencinger, Aristovnik, & Verbic, 2015) Has conducted a study to find out the role of external debt in growing economies and a data from 1980-2010 is taken and the results shows that there Is a positive negative correlation between debt to gdp ratio. (Lahiani & d’Orléans, 2015) Has conducted a study to find out is external debt effected the economic growth of South Africa? The results from 1980-2014 has been taken and the results show that there is a positive relation of external debt in the economic growth of South Africa. (cuestas & regis, 2015) Has conducted a study to check the level of sustainability of external debt . the results from 1984-2013 has been taken and the results has shown that there is a positive relation of external debt in economic growth. Research Methodology Analysis of the units: We want to study the economy of Pakistan; in this case we select different units large portion of Pakistan economy is financed by the external institutions. Data analysis and collection of data: From the site of World Bank we collected secondary data. Time series data is collected from the World Bank site for the last thirty years ranges from 1986-2015. Econometrics techniques: Statistics analysis and ordinary least square regression is performed through a descriptive statistical table. Specification of the model: To check the relationship between economic growth and external debt OLS model is used. GDP is our dependent variable. Gross domestic saving, gross capital formation and external Debt stock is Journal for Studies in Management and Planning Available at http://edupediapublications.org/journals/index.php/JSMaP/ e-ISSN: 2395-0463 Volume 02 Issue 1 January 2016 Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 86 our independent variable. So the equation become GDP: βο+β1EDS+β2GCF+β3GDS+μ Data analysis and report writing Descriptive statistics: Descriptive results which are obtained by the descriptive statistics are given in the table below. The table shows that there are 30 observations which have been chosen as a sample. There are different statistical facts which are shown in the table such as median, mean, standard deviation, minimum, maximum etc. Pakistan average GDP from the year 1985-2015 is 98540 million US$ . The average of external debt stock is 34164 million US$ . The results show that the huge amount of number of GDP of country is backed by external debt.


Introduction
External debt is known as foreign debt. External debt is a kind of debt which is held by the creditors of foreign countries of the world. These are the debts that including the interest, this is the interest must usually be paid in the currency in which the loan was made. Pakistan usually takes loan in the form of dollars from IMF and USA and from the other countries. Pakistan has to pay that loan in the form of dollars. Pakistan current external debt is $56 billion. In 2012 the external debt of Pakistan was almost $54 billion. The IMF is one of the few international agencies which are actively involved in the work of measuring and monitoring the external debt of the countries. The external debt of Pakistan increases at a rate of 7.6 percent annually. Almost every country in the world borrows the money from the other countries despite of this the country is rich or not. Because the world economies are inter related with each other. Sometimes it is much easier for a country to take an external debt from the other countries rather than take the loan domestically from the central bank of that country. Pakistan ranks at number 59 th in the list of external debts by a country. In this article we will able to find the role of external debt in the economy of Pakistan. Pakistan also ranked as the most developing countries in the world and Pakistan is one of the countries in the world that is facing serious external debt problems. Pakistan is taken loan from IMF and other banks for various reasons.
Such as developing projects in country, buying of different types of equipments from other countries, meeting the long term and as well as short term liabilities. These are the reasons for which the external debt of Pakistan is increasing day by day. Role of external debt in any country has no consensus.
There are different articles that are published to define the role of external debt in the economy of country. Different researchers gain different There are many ways in which Pakistan can reduce its foreign debt. The first and better way is that Pakistan has to reduce its imports and balance of payments and should establish the resources to promote the exports. Pakistan can reduce its debts by paying the debt.

Objectives
The objective of this research is to find out the positive and negative effect of external debt towards the economy of Pakistan.
Objective is to find weather external debt increases capital inflow of the country or not.
Objective is to find out the reasons why external debt is taken.

Literature Review
There are a large number of studies which have been conducted by the different economists and the researchers having a goal to check that either the external debt effect the growth of the country or not. In this research we conclude that there is a negative impact of external debt and positive impact of domestic debt on the economic growth.
We conclude that external debt is having a negative impact on the economic growth and the external debt is considering a burden on nation and economy. Some researchers studies shows that external debt is having positive impact on the economic growth of a country and some researcher studies shows that external debt is having negative impact on the economic growth of a country. Huge amount of number of GDP of country is backed by external debt.

Recommendations
In the light of my research, following are my recommendation that can lead to improvement in our GDP. Government has to make a focus on the efforts to manage the external debt of the country by using them in the productive activities which results to increase the level of output in the country. Government should emphasize on encouraging capital formation as it will lead to improve Gross Domestic Production of the country. There should be effective Government policies that provoke capital formation on the large scale. Furthermore, there should be proper planning for the efficient use of external debt stock as it will make a positive impact on Gross Domestic production as well.