Capital Inflows and National Debt

Abstract

Using a three-gap model, this paper simulates the future time paths of resource deficits in Pakistan. The paper then show that the policy of increasing the rate of return on foreign capital can reduce foreign debt when foreign capital is sufficiently responsive to changes in its rate of return. This, however, happens at the expense of increasing domestic debt. The policy of selling public assets abroad appears fruitless. The main benefit of this policy is a reduction in domestic debt which can better be achieved by selling public assets domestically.