RISING INDEBTEDNESS IS A PANACEA OR A CURSE FOR ECONOMIC GROWTH IN PAKISTAN

Abstract

Economic growth of Pakistan is facing the downward trend over the years. The major factors affecting the economic growth of Pakistan are fiscal indiscipline, political instability, high interest rates and rising debt both externally and domestically which puts pressure on the growth of economy. The government will rely on public debt when it fails to generate enough revenue to meet the current and development expenditures so it rely on debt. The rate at which debt accumulation takes place and debt servicing cost are the main factors influence growth. The debt will affect positively if it is used properly in resource generating projects which will able the economy to repay debt otherwise it will affect negatively by lowering the growth. In the present study we examine the non-linear relationship between public debt and economic growth in Pakistan over the period 1976-2015. We use ARDL technique to examine the long-run and shortrun relationship between public debt and economic growth. The results show that high levels of public debt affect growth negatively and at low levels the debt have positive impact but insignificant because of mismanagement of public debt. The overall impact of debt on growth is negative but not significant because of the debt limitation act (2005) according to which our debt to GDP ratio will not exceed 62%.