Is External Debt a Boon or a Curse? Empirical Evidence from South Asian Countries

Abstract

Over the years, the South Asian countries were facing the dilemma of twin’s deficits because they had failed to generate sufficient revenues to finance their budget. Consequently, they were continuously relying on both domestic and external debt to bridge these deficits which had put a severe implication on their economic growth. Their financial position continued to deteriorate and undermined all the efforts of the governments made to stimulate economic growth. The governments in these countries failed to generate enough revenues through internal sources. Therefore, the deficits were normally fiancé through external sources. The paper examined whether the external debt was a blessing or course to the economic growth of South Asian countries i.e. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. For this purpose 30 years of panel data of these countries from 1990 to 2019 had been taken. Fixed effect model and Panel Autoregressive Distributive Lag (ARDL) Approach had been applied to examine the short-run and long-run association among the variables. The natural log of GDP per capita was used as a proxy for economic growth. The other variables were external debt, initial GDP, foreign direct investment, trade openness, investment, and secondary school investment rate. The outcomes of the study indicated that that external debt had a negative impact on economic growth both in the short-run and long-run. This revealed that external debt had not been utilized effectively and productively. The study suggested that effort would be made to manage the external debt and reduced the twin's deficits to minimize the harmful impact of external debt on the economy. Keywords: South Asian, External Debt, ARDL, Fixed Effect Model, Economic Growth.