This study aims to determine the debt threshold of foreign debt and investigate the effectiveness of debt overhang effect beyond this threshold. ARDL model is framed within the structure of Solow growth model for estimating the coefficients of this model. Quadratic bivariate model is applied to determine the optimum level of debt-threshold. Different sort of diagnostic tests are also conducted in this study. Sample period is ranging from 1976-2020. This study finds that debt overhang is effective above the optimal level of foreign debt which is 26.4% of gross domestic product. Findings also depict that Pakistan is experiencing the debt-overhang effect since 1976 as the ratio of external debt-to-GDP has remained over and above the optimal level of debt across the sample. Since no government can avoid external borrowing completely, therefore this study recommends that government borrowing should be restricted to the optimum level of foreign debt. Similarly, efforts should also be made for downsizing the debt burden by utilizing the nondebt sources of finances like grants and revenues and that effective debt-management policies should be formulated for enhancing the economic productivity.