Abstract

This study aims to highlight the problems created by the debt (external debt) to economic growth of Pakistan. Time series data from the FY1981 to FY 2008 is used. The analysis includes five variables. Growth rate of GDP per capita is taken as a dependent variable while external debt to GDP ratio, investment to GDP ratio, population growth rate and trade openness are independent variables. The ADF- Unit Root Test is applied to check the stationarity of data. The co-integration estimation is applied, which shows the long run relationship between external debt and growth rate of GDP per capita. Furthermore, the Granger Causality Vector Error Correction (GCVEC) method has proved uni-directional relationship between external debt and growth rate of GDP per capita. There is no doubt that other macroeconomic variables also affecting the economic growth but the long term relationship of debt and economic growth has proved that the main economic indicator behind the low economic growth is debt.

Key words: Debt, economic growth, Pakistan.