External Debt and Capital Accumulation Nexus: Evidence from Pakistan

Abida Yousaf, Tahir Mukhtar

Abstract


The rising public debt burden is a common feature of
developing countries like Pakistan. This study is an attempt to
empirically analyse the external debt and capital accumulation nexus for
Pakistan from 1972 to 2016. The ARDL bound testing technique was
employed to estimate two models which incorporate different indicators
of external debt. Results indicate the existence of a negative
relationship between external debt to revenue ratio and stock of capital
that supports the debt overhang hypothesis for Pakistan. The debt
overhang hypothesis states that large accumulated debt leads to a
decrease in overall capital accumulation in an economy. Similarly, other
indicators of external debt, namely, external debt service to revenue
ratio, external debt to export ratio, and external debt service to
export ratio tend to bring a fall in stock of capital in Pakistan. Based
on its findings, the study suggests the need for better and productive
use of external debt in public sector development projects to foster the
capital accumulation process in Pakistan. JEL Classification: H63; H71;
E24; H63 Keywords: External Debt; Capital Accumulation; Human Capital;
ARDL.

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DOI: https://doi.org/10.30541/v59i1pp.29-44

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