Interest Rate Dynamics and External Debt Accumulation: Empirical Evidence from Pakistan

Abstract

The empirical investigation into the relationship between interest rates and external debt in Pakistan, employing the Autoregressive Distributed Lag Model (ARDL), represents a significant contribution to the literature on macroeconomic policy and development finance. By utilizing time series data spanning over four decades, from 1972 to 2016, this study offers valuable insights into the dynamics of external debt accumulation and servicing in the Pakistani context. The selection of variables, including External Debt (Ext-D), Interest Payment (Int-P), GDP, Budget Deficit (BD), Exchange Rate (ER), and Debt Services (DS), reflects a comprehensive approach to understanding the determinants and implications of interest rates on external debt dynamics. Particularly noteworthy is the use of "Interest Payment" data as a proxy variable for the actual interest rate, which enhances the empirical robustness of the analysis and facilitates a more nuanced examination of the relationship under investigation. The focus on development projects in Pakistan adds a practical dimension to the study, as it underscores the relevance of interest rate policies for financing critical infrastructure and social initiatives. By elucidating the linkages between external debt and interest rates within the context of development financing, the study provides valuable insights for policymakers and practitioners tasked with designing effective strategies to promote sustainable economic growth and development. Furthermore, the discussion on the role of government policies and donor agencies, with a particular emphasis on the International Monetary Fund (IMF), enriches the analysis by highlighting the external factors that shape interest rate dynamics and debt management practices. The interaction between domestic policy choices and external influences underscores the complexities inherent in managing external debt and navigating the challenges of development finance. Overall, this paper contributes to a deeper understanding of the interplay between interest rates, external debt, and development outcomes in Pakistan. Its empirical rigor, comprehensive methodology, and insightful discussion offer valuable guidance for policymakers, researchers, and practitioners seeking to formulate effective policy interventions and foster sustainable development in the country.