Academic journal article The Journal of Humanities and Social Sciences

How Can Pakistan Improve Its Rising External Debt Situations?

Academic journal article The Journal of Humanities and Social Sciences

How Can Pakistan Improve Its Rising External Debt Situations?

Article excerpt

(ProQuest: ... denotes formulae omitted.)


The growing external debts of developing nations persist to deter their socioeconomic developments. Although there have been numerous plans aims to resolve the crisis, however, no one plan has established to be wholly successful. The external debt burdens of middle-income and developing countries have sustained to augment. In the presence of unsustainable external debt, many developing, and least developing countries would not be able to have access to primary education, clean water, or be free from severe poverty as the governments have to spend more on debt retirement than on social services. The futures of these nations can be altered with the proper utilization of the borrowed funds and domestic resource mobilization towards poverty reduction and social expenditures.

Generally, external borrowings were believed that it would be beneficial in filling the current account deficit in a capital-starved country. But the prevalent evidences showed that external borrowing persuaded government to earmark higher percentage of borrowed funds to less preferable projects. Similarly, it affected self-reliance and affects domestic saving adversely. Additionally, it protracted reliance on external borrowing [Griffen (1970); Qureshi et al. (1997); Boone (1996)]. From the policy perspective, the profit and outcome from the external assistance are believed to be foremost. It also affects International Financial Institutions (IFIs) plans in sharing of assistance among various debtor's countries. The efficiency of aid is significantly associated with decision of the donors regarding supply of aid to the debtors. Efficiency of foreign assistance is affected by poor economic performance of the recipient country [Burnside and Dollar (2000); Collier and Dollar (2002); Carl-Johan (2004)].

Addison (2006) observes that due to the high social returns from spending on basic health care, primary education and safe water and sanitation, rates of returns that surpass concessional and certainly commercial, rates of interest-it makes sense to have access to both externally and domestically for economic growth and poverty reduction as well as better execution of output and employment throughout the business cycle.

International Monetary Fund (IMF) initiated the Highly Indebted Poor Countries (HIPC) plan in 1996 in an effort to lessen the debt burden of low-income countries to the sustainable levels in a due course of time. How much advantages did this plan creates for the low-income countries? The available literature probing the connection between decline in foreign debt and GDP growth provides diverse signs to the researchers in both developing and developed countries. Claessens (1990) observes that the measures taken by the creditors to shrink external debt of a debtor's will help both. However, Clements et al. (2003) advocate that debt relief may have negative impacts on debtors and that reform plan may be more efficient than debt relief. In the same way, Berensmann (2004) of the view that debt relief is a helpful but not a sufficient condition for economic development.

This study examines how a rising poverty level, growing external debt and debt services could deter socio-economic development. The issue addressed here is whether saving-investment gap, trade openness, poverty and inequality influence the external debt. The main innovation of the study is the introduction of factors i.e. poverty, unemployment and inequality into the analysis. Further role of trade openness which may lead to increase in trade deficit is to be discussed in the present research. At the same time the study addresses how well the indicators used to measure external debt sustainability are satisfactory in the Pakistan's context?

The organization of the study is as follow; Section-I is outlining introduction to the study. Section-II discusses literature involved. Section-III highlights theoretical approach of the study. …

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