Relationship between External Domestic Debt and Economic Growth

Abstract

Purpose: Pakistan is surrounded by serious socio-economic problems. Due to the low tax base and double deficit, Pakistan has to rely on internal and external capital flows. Foreign capital flows are not easily accessible, but domestic capital flows are always accessible

Methodology: The study investigates the effects of domestic debt on economic growth in Pakistan by applying the OLS technique

Findings: The study indicates that the stock of domestic debt positively affects economic growth in Pakistan. This clearly means that the resources generated through internal debt have been partially used to finance public spending which contributes to economic growth. The study also notes that there is an inverse relationship between domestic debt service and economic growth. This result is due to the fact that the enormous burden of non-development spending hinders economic growth. The study results reveal that the negative effects of domestic debt service on economic growth is stronger than the positive effects of domestic debt on economic growth.

Unique Contribution to Theory, Policy and Practice: The study also suggests some policies to repay existing internal debt.