Non-IMF Foreign Debt and Economic Growth: A Case of Developing Economy

Abstract

Purpose: This Study aims to investigate the impact of foreign debt on the economic growth of Pakistan by categorizing the foreign debt into two different factors: IMF debt and non-IMF debt. Design/Methodology/Approach: The secondary data was taken quarterly from the State Bank of Pakistan for the period 2010 to 2021, and Johansen cointegration analysis and the Vector error correction model were used to study the relationship. Findings: The study's findings revealed that the IMF debt is significantly positive in the short run, while non-IMF foreign debt has an insignificant relationship with economic growth. Moreover, short-run results also found an insignificant relationship between foreign debt servicing and inflation rate and economic growth. On the other hand, in the long run, the relationship between IMF debt, foreign debt servicing, and the inflation rate were found to be significantly negative with the economic growth, whereas a significant positive relationship was identified between the non-IMF foreign debt and the economic growth. Implications/Originality/Value: The study concluded that the authorities should avoid foreign debt from IMF and rely upon non-IMF foreign debt if ever financing through foreign debt is needed. Even though the non-IMF foreign debt has a positive impact on the economic growth in the long, this positive effect is counter-negated by the cost of foreign debt, which is the foreign debt servicing, due to its significant negative impact on the economic growth of Pakistan.