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Debt Burden of Pakistan: Impact and Remedies for Future

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

Debt Burden of Pakistan: Impact and Remedies for Future

1 2 3
*Muhammad Ayyoub , Imran Sharif Chaudhry , & Sajida Yaqub
1 2
Lecturer in Economics, Government Emerson College, Multan. Pakistan. Associate Professor of Economics,
3
Bahauddin Zakariya University, Multan, Pakistan. BS Economics Student, Department of Economics,
Bahauddin Zakariya University, Multan, Pakistan.
*ayubch23@yahoo.com
Abstract
The core purpose of the present study is to investigate the impact of debt on overall GDP, manufacturing sector
growth and unemployment situation of Pakistan. By applying OLS technique for analysis on the secondary data
for the period 1989-90 to 2009-10, the study results that these are actual expenditures on debt servicing which
are mainly responsible for the worst situation of less productivity, increasing unemployment and less
contributing manufacturing sector. Whereas the external debt and liabilities to GDP ratio is found positively
related with the growth of manufacturing sector. External debt and liabilities to GDP ratio has been found to
have positive and statistically significant relationship with the overall GDP levels of the economy. The study
strongly suggests reducing the expenditures on debt servicing, to utilize the external debt on more productive
expenditures, to reduce the population growth rate, to control the hyper inflation, and to reduce the overall
government deficit in the economy.
Key Words: Debt, Manufacturing Sector, OLS, Pakistan, Unemployment

1. Introduction
Most underdeveloped economies depend heavily on external resources to make their nations developed and
prosperous. This foreign assistance can be in the shape of interest bearing debt, aid, foreign direct investment,
provision of skilled manpower and transfer of technical skills. This type of “foreign assistance” is now being
considered as an individual factor of production for developing economies. However this is widely debated and
is still controversial that whether this assistance, particularly external debt and liabilities, is fruitful or making
adverse effects on the living standard of common man in underdeveloped countries. Moreover, there is
general agreement that resource flows among nations increase economic efficiency and welfare in both rich
and poor countries. In the presence of capital market imperfections the transfer of resources from developed
countries to developing countries on commercial terms, can normally be expected to be welfare-enhancing in
both developing and developed countries (Krueger 1986).
But this does not depict the true story all the times. Especially for those developing economies, where trade
and fiscal gaps are large. It is the second type of economies where there good-governess is an illusion and
allocation of resources usually base upon immature economical and political decisions. Where there is
common to spend all type of “foreign assistance” on security measures and non-productive expenditures.
Unfortunately, the economy of Pakistan is also among the second type of countries, where it is very natural
and simple to get external debt on strict terms and conditions, usually, on high interest rates. It is always just
because to fill the existing gaps of the economy. This is the reason the external debt and liabilities bear very
less fruit to the people of Pakistan. It requires re-scheduling on fresh terms and conditions. It also, sometimes,
damages the sovereignty of the nation.
This study directly aims to explain the concept of foreign debt policy of Pakistan and to identify the problems
necessitating foreign debt. Further it is to examine the impact of foreign debt on macroeconomic variables
empirically and to investigate the impact of foreign debt on common man. It is, moreover, on the basis of
empirical analysis, to recommend some policy options and remedies for the future. All these targets have been
planned to achieve by using the most recent data for the period 1989-90 to 2009-10.
The rest of the study is arranged as follows: In section II, a brief review of the empirical studies of these two
decades has been presented. The composition and trends of external debt and its relationship with other
important macroeconomic variables for the economy of Pakistan have been discussed in section III. The data,
methodology and econometric specification of different models have been briefly mentioned in section IV. The

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

empirical results have been discussed in section V. Finally, the conclusion and remedies for futures have been
presented in section VI.
2. Review of Literature
Hans (1948), Singer (1949), Nurske (1953) and Olaniyi (1995) identified that lack of capital is one of the causes
of LDC’s low level of income. To them, the LDCs suffer from vicious cycle of low production and insufficient
tools and equipment among other factors, which helps to accelerate their low productivity. The resulting
situation as argued by singer (1994) is mass poverty and low standards of living. The neo-classical economists,
therefore, recommend that for these developing countries to escape this vicious circle of poverty and achieve
rapid economic growth and development, they must go in for foreign assistance to augment domestic savings
(Olaniyi, 1995). Other views claimed that in the 19th century, the rapid growth of U.S.A had been through the
large supplied of workforce and funds from Europe particularly from Britain.
Various studies on the relationship of external debt and liabilities and other macroecomic variables in the
context of developed and underdeveloped countries have been presented. Though our particular interest is in
the studies regarding the economy of Pakistan, we have reviewed some important empirical studies. These can
be summarized as follows:
Chenery and Strout (1966) observed that most countries before 1966 were able to achieve economic
transformation by avoiding from foreign aid and foreign debt. To them, to achieve accelerated growth,
countries must improve in the areas of skills, domestic savings and foreign exchange earnings. However, since
in most developing countries, the savings rate is low, to overcome poor growth and development, they see
foreign aid as the only source of their economic transformation.
Khan et al. (1992) examined the impact of real per capita income, GDP growth rate, trade, dependency ratio,
foreign capital inflows, and foreign aid to GNP ratio on the national saving rate of Pakistan, using time-series
data for the period 1959-60 to 1987-88. He estimated the model with OLS techniques and found that one of
the reasons for the low rate of savings in Pakistan is foreign capital inflow. The study confirmed foreign capital
inflow’s depressing effect on national savings in Pakistan. According to the results, a one percent increase in
the inflow of foreign capital reduces savings by 0.21 percent.
Shabbir and Mahmood (1992) studied the impact of foreign financial inflows such as foreign private
investment and aid on economic growth and domestic savings of Pakistan over the period of 1959-60 to 1987-
88. They used the Two Stage Least Square Method for estimation of simultaneous equations. The major
conclusion of their study is that net foreign private investment and disbursement of grants and external loans
have a positive impact on the rate of growth of real GNP in Pakistan and that foreign financial inflows may
discourages domestic public and private saving behavior and resource mobilization efforts.
Chaudhary and Ali (1993) analyzed Pakistan’s outstanding external debt up to the year 2009-10 and presented
an alternative measure to reduce debt burden. They proposed to increase savings as a policy measures to
overcome the debt problem. According to them, Pakistan can increase its savings by 3 percent, and then it can
significantly reduce dependence on foreign resources. They focused on projection of Pakistani foreign debt.
They projected the foreign debt for the period of 1992-93 to 2009-10. The empirical findings of the study are
consistent with economic theory. Pakistan’s foreign dependence will be doubled by the year 2010 as
compared to 1992-93. Similarly, its debt servicing as a percentage of GNP will more than double by the year
2010. They gave trade policy as an alternative strategy to debt and suggest that if Pakistan can increase its
exports by 2 percent and reduce imports by 2 percent; borrowing can be decreased by a considerable amount.
Khan and Rahim (1993) examined the impact of annual changes in net economic assistance receipts on
changes in two indicators of economic development; domestic savings and economic growth of Pakistan. The
analysis incorporates regression of OLS using the sample years 1960 to 1988. The estimated regression
equations for domestic savings provided negative coefficients of correlation between foreign aid and domestic
efforts for resource mobilization. Aid in grant also exhibits a positive effect on economic growth after one year
of actual disbursement, but its estimated coefficient is insignificant.

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

Ahmad and Ahmad (1998) attempted to study the nature of debt crises in Pakistan with the help of a stock-
flow consistent three-gap simulation model. They explained that if the interest rates on debt and foreign
capital, growth rates of real GDP, foreign capital, foreign exchange reserves, money supply, price level and
exchange rate, and the parameters characterizing national saving rate and productivity remain unchanged
then the debt crises in Pakistan will be worsened.
Kemal (2001) analyzed the debt accumulation and its implications for growth and poverty in Pakistan. The
study demonstrated that debt accumulation and debt servicing affects the poor adversely. The findings of the
study explained that even though debt burden as a percentage of GDP of Pakistan exceeds that of all South
Asian countries but it is not still so high as to go for debt write off. The conclusion of the study is that Pakistan
has the capacity to service the debt.
Siddiqui and Malik (2002) estimated directly the impact of debt on GDP growth rate and argued that debt
accumulation and growth had a non-linear relationship: up to a certain level the impact was positive and
beyond the threshold level the relationship turned negative. The study exerted mixed evidence regarding the
impact of debt burden on economic growth. While debt accumulation in other countries of south Asia so far
has not had a negative impact on the growth rate, debt accumulation in the case of Pakistan in resulting in low
growth.
Uzochukwu (2003) explored the quantitative effects of public debt and economic growth on poverty in Nigeria
by applying the per-capita income approach using annual data of 1970 to 2002. The study used growth and
debt variables and concluded that these variables had played very vital role towards poverty acceleration in
Nigeria.
Schclarek (2004) investigated the relationship between gross government debt and per capita GDP growth in
developed countries. The results of the paper show that there is no strong evidence of a statistically significant
relationship between gross government debt and per capita GDP growth for a sample of 24 industrial
countries with data from 1970 to 2002.
Sheikh et al. (2010) investigate the impacts of domestic debt on economic growth in Pakistan by applying the
OLS technique for the period of 1972 to 2009. The study indicated that the stock of domestic debt affects the
economic growth positively in Pakistan. They concluded that the resources generated through domestic
borrowing have been used partially to finance those expenditures of government which contribute the
economic growth. Moreover, they found that there is a negative relationship between domestic debt servicing
and economic growth. They suggested that this result is due to the fact that huge burden of non-development
expenditures harms the economic growth. The findings of study reveal that the negative impact of domestic
debt servicing on economic growth is stronger than positive impact of domestic debt on economic growth.
3. External Debt Policy of Pakistan in 1990S and 2000S
This section of study is particularly reserved to analyze the foreign debt policy of Pakistan during 1990s and
2000s. With the desire to achieve higher standards of living by enhancing the growth rate of GDP and GNP,
and to follow the famous Harrod-Domar Growth Model of long term economic growth, during 1950s, Pakistan
started economic planning in which foreign borrowings had to play a vital role to achieve different targeted
indicators. Thus the process of debt accumulation had been continued up to date.
During 1990s and 2000s, there were two times when governments of Pakistan announced not to accept any
interest bearing debt. But it remained very short-term policies of the concerned governments. The external
debt and liabilities had always been rescheduled by donor agencies and countries on fresh terms and
conditions. According to the Economic Survey 2010-11, total external debt has been reached the maximum
position of the history of Pakistan, which is $ 59.5 billion. Indeed the debt servicing expenditures of this heavy
debt has always been a curse for the developing economy of Pakistan. Most part of the external debt has been
borrowed from International Monetary Fund (I.M.F).
Pakistan entered into nine different agreements with the IMF during the period 1988- 2000. The major
factors which contributed towards the motivation of borrowings from IMF included need to obtain financial
resources for BOP problem, secure access of funds from other IFIs and bilateral donors, to get debt relief and
rescheduling in the post 1998 period. During the period 1988-2000, the prolonged uses of fund resources in

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

Pakistan can be characterized as less successful in achieving the desired objectives. One among other major
reasons was that the governments used foreign resources to fix the external payment gaps but they did not
adopt complementary policy reforms. These are the reasons that debt position of Pakistan worsened very
rapidly. It is very important to trace time dimension of these two decades in relation to debt burden and debt
servicing to GDP ratio with some other important indicators of external debt and liabilities.
The Figure: 1 below depicts debt accumulation process of Pakistan in the last two decades. It is

Figure:1
External Debt and Liabilities as Percentage of GDP

60
50
40
% 30
20
EDLGDP
10
0

Years

mentioned with the help of external debt and liabilities percentage in relation to overall GDP of the economy
for the attempted time period of the study. It is very clear that it had an increasing trend from 1989-90 to
1991-2000, then decreasing but, again increasing from the fiscal year 2006-07.Its current ratio is more than 30
percent of GDP which is very high and shows an alarming situation for our economy. If we look at the debt
servicing to GDP ratio of the economy, its again very discouraging that we have to pay for debt servicing for
more than our GDP growth rate. As it can be traced from the Figure: 2 that with the exception of the period
2003-04 to 2007-08, the growth rate of GDP had never been to greater than the debt servicing expenditures of
our GDP. It seems a serious problem which we shall address empirically in the subsequent sections of this
study.

Figure:2
Total Debt Servicing to GDP Ratio in relation with GDP
Growth Rate
14
12
10
8
% 6
4 GDPG
2 TDSGDP
0

Years

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

Figure:3
External Debt and Liabilities to GDP Ratio in relation to
Unemployment Rate
70
60
50
40
% 30
20 EDLGDP
10
0 UNEMP

Years

The trends depicted in Figure: 3 show the relationship between unemployment rate in the economy (UNEMP)
and external debt and liabilities to GDP ratio (EDLGDP). The two trends show a weak positive correlation
between these two variables. UNEMP has been remained almost stable during the two decades. It is, no
doubt, against the hopes of a common man and also for the policy making point of view. Since the theory says
that there must be reduction in UNEMP with the foreign assistance in the country. It will also be our topic of
empirical analysis of MODEL-C in the section IV and V.
The Figure: 4 trace the relationship between actual figure of GDP in million rupees and total external debt of
Pakistan in million rupees (EXTDBT). It graphically shows that the gap between GDP and EXTDBT has been
increasing with every passing fiscal year. The widest gap had been observed during the fiscal year 2006-07. It
had been shortened just for two fiscal years, now it is again widening, which, in fact an alarming situation for
the economy. Although GDP has been increasing, the external debt also increasing with greater proportion.

Figure:4
Total GDP in Realtion to External Debt in Million Rupees
30000000
25000000
Million Rupees

20000000
15000000
10000000 EXTDBT
5000000 GDP
0

Years

4. Data and Methodology

Keeping in view the above discussion, it can be concluded that the foreign debt policy of Pakistan may also be
analyzed by econometric tools to investigate its effects on the economy. So that remedies for the future may
also be suggested in the light of results drawn from the data. For this regression analysis, the log of total GDP
in million rupees (LGDP), manufacturing sector growth rate (MNFG), and unemployment rate in the economy

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

(UNEMP) for the studied time period have been selected as dependent variables. Whereas, log of external
debt and liabilities (LEXTDBT) and external debt to GDP ratio (EDLGDP) have been analyzed individually to
investigate its effects on the attempted explained variables to measure the effects of foreign debt policy on
common man of Pakistan. It is further explained that log of total debt servicing in billion rupees (LTDSBN) for
the attempted time-period has also been taken as explanatory variable. Log of total domestic debt in million
rupees (LTDDMN) is another important predicting variable. These macroeconomic variables, having strong
relation and impact on foreign debt and debt servicing, have been selected keeping in view their relative
importance on theoretical and empirical basis.
The data for this study are taken from Pakistan Economic Survey (various issues), Ministry of Finance, Fifty
Year Economy of Pakistan (SBP) and World Bank Quick Query selected from World Development Indicators.
Data are ranging from 1989-90 to 2009-10 and consists of wide range of different important macroeconomic
variables which explain their relationship with external debt and liabilities to affect the GDP, manufacturing
sector growth and rate of unemployment in the economy.
In order to examine the impact of the external debt and liabilities to GDP ratio and external debt on GDP,
Manufacturing sector growth and unemployment rate in the economy, we have specified five equations.
These are estimated by employing the method of Ordinary Least Squares (OLS). Regression errors in equations
of these models are tested for autocorrelation with the help of Durban Watson (DW) test statistic. These
equations are specified as follows:

LGDP = 0  1(LEXTDBT )  2  LTDDMN   3 (CINF )  4  LEXPT 

 5  LPOPM   6 (GDFT )  7 ( NSAVG)   ...........Eq(1)

LGDP =0 1(EDLGDP) 2 (LTDDMN ) 3 (LEXPT ) 4 (LPOPM )  .......Eq(2)

Where:
LGDP = Log of Total GDP in Million Rupees
LEXTDBT = Log of Total External Debt in Million Rupees
CINF = CPI Inflation Rate
LEXPT = Log of Total Exports in Million Rupees
LPOPM = Log of Total Population in Millions
GDFT = Overall Govt. Deficit, Percentage of GDP
NSAVG = National Savings Growth Rate
EDLGDP = Ratio of External Debt and Liabilities to GDP
LTDDMN = Log of Total Domestic Debt in Million Rupees
Є = Error Term
and β0, β2 , β4 , β7, α1,α3, α4 > 0
β1, β3, β5, β6, α0, α2 < 0

MNFG =0 1 ( EDLGDP) 2  LTDSBN   3 (CINF ) 4 ( XPGDP)

5 ( LPOPM )  6 (UNEMP)  7 ( NSAVG)  8 ( LITR)   ..........Eq(3)

MNFG = 0  1  LTDSBN   2 (CINF )  3 ( XPGDP)

 4 (M 2G)  5 (OPNS )   ..........Eq(4)
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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

Where:
MNFG = Manufacturing Sector Growth Rate
EDLGDP = Ratio of External Debt and Liabilities to GDP
LTDSBN = Log of Total Debt Servicing in Billion Rupees
CINF = CPI Inflation Rate
XPGDP = Total Exports to GDP Ratio
LPOPM = Log of Total Population in Millions
UNEMP = Unemployment Rate in Economy
NSAVG = National Savings Growth Rate
LITR = Literacy Rate
M2G = Annual Money Supply Growth Rate
OPNS = Trade Openness
Є = Error Term
and
λ 0, λ3 , λ4 , φ1 ,φ4 ,φ5 ,φ7 > 0
λ 1 ,λ2 ,λ5 , φ0 ,φ2 ,φ 3, φ6, φ8 < 0

UNEMP    1(EDLGDP)   2 (LTDDMN )   3( LPOPM )   4 (CINF )

0
  5 ( XPGDP)   6 (OPNS )   ...............Eq 5
UNEMP = Unemployment Rate in Economy
EDLGDP = Ratio of External Debt and Liabilities to GDP
LTDDMN = Log of Total Domestic Debt in Million Rupees
LPOPM = Log of Total Population in Millions
CINF = CPI Inflation Rate
XPGDP = Total Exports to GDP Ratio
OPNS = Trade Openness
Є = Error Term
and
γ1, γ3, γ4 > 0 whereas γ0, γ2, γ5, γ6 < 0

The regression results of the above specified equations have been discussed in the subsequent section.
5. Results and Discussions
There are many factors which determine the level and rate of GDP of any economy, manufacturing sector
growth rate, and unemployment rate. It mainly depends upon the state of the economy. We are interested to
analyze the impact of foreign debt and debt servicing on level of GDP of Pakistan, by using the secondary data.
Some other explanatory variables are also been included in the econometric analysis. The regression results
from the above specified equations are arranged in the Table 1, Table 2 and Table 3. These results can be
interpreted as follows:
MODEL- A (Equation 1 and Equation 2):
The results of the estimated equations 1 and 2 explain that our specified model performed quite well in terms
of F-statistic. On the basis of our hypothesis that all the variables are jointly significant, the results describe
2
that our model is highly significant. The value of R is 0.98 in both the equations, explains that 98 percent
variations in the total GDP are explained by the attempted independent variables of the estimated model. If
the DW-statistic is considered, we can accept the null hypothesis that autocorrelation is absent from the
regression errors.

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

Now coming to the behavior of individual regression coefficients of Equation 1, we find that the estimated
coefficients are according to the theory. The results indicate that the co-efficient of LEXTDBT is negative and
shows that 1 million rupees increase in external debt and liabilities cause to reduce the GDP of the economy
by 0.94 million rupees. This shows strong negative effect on GDP of Pakistan in the attempted time-period
data. But it is worth mentioning that this
result is not significant. The positive coefficient of log of total domestic debt in million rupees (LTDDMN) is
0.876 which shows positive and significant effect upon GDP. It can be interpreted that 1 million increase in
domestic debt cause to increase the GDP of economy by 0.876 million rupees. The other explanatory variables
CINF and LPOPM show negative, whereas GDFT and NSAVG show positive impact on GDP of the economy.
Now coming to the second Equation 2,
Table 1: Parameter Estimates of Estimated Equations 1 and 2
(Dependent Variable is Log of GDP in Million Rupees)

Independent Variables Equation 1 Equation 2

15.390 -13.859
Intercept
(1.987)*** (-1.711)***

Log of External Debt in Million -0.9390

----------
Rupees (LEXTDBT) (-1.229)

External Debt and Liabilities to 0.017

-----------
GDP Ratio (EDLGDP) (5.051)*

Log of Total Domestic Debt in 0.876 -0.983

Million Rupees (LTDDMN) (2.046)*** (-2.188)*

-0.012
CPI Inflation (CINF) --------
(-2.265)**

Log of Total Exports in Million 1.606 0.711

Rupees (LEXPT) (2.459)** (2.4711)**

Log of Population in Millions

-3.970 6.613
(LPOPM)
(-1.16) (1.948)***

-0.060
Overall Govt. Deficit (GDFT) -----------
(-3.115)*

National Savings as Percentage of

0.065
GDP(NSAVG) -----------
(1.308)

R- Squared 0.98 0.98

Adjusted R-Squared 0.98 0.97
D W Statistic 1.93 1.63
Sample Size 21 21

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

Note: The t-Statistics (in Parenthesis) significant at 1 %, 5% and 10% level are indicated by *, ** and ***
respectively. All estimations are carried out by E-views 3.1 (Quantitative Micro Software).
the co-efficient of external debt and liabilities to GDP ratio (EDLGDP) is positive and significant at 1 percent
level. But it can also be observed that it is weakly positive relation as the value of the co-efficient is just 0.017.
Whereas the behavior of LTDDMN in this model is in sharp contrast with the Equation 1 as it has negative
impact on GDP of the economy. The other explanatory variables LEXPT and LPOPM have significant positive
impact on LGDP.
MODEL-B (Equation 3 and Equation 4):
Likewise the MODEL-A, results of the estimated MODEL-B (Equation 3 and 4) explain that our specified model
is well in terms of F-statistic. All this results are arranged in Table 2.
The behaviors of the coefficients of independent variables of specified equation 3 show that EDLGDP has the
positive co-efficient of 0.314. It reveals the fact that 1 percentage point increase in EDLGDP will cause to
increase MNFG by 0.314 percentage point. Whereas -5.97 co-efficient of LTDSBN shows that 1 billion increase
in debt servicing expenditures will cause to reduce the growth of manufacturing sector by 5.97 percentage
points. It is very strong and significant (at 1 percent level) effect which unveils the fact that debt servicing
expenditures of the economy is the major evil to harm the MNFG. All results of other explanatory variables
CINF, XPGDP, LPOPM, UNEMP, and NSAVG are according to the theory and found statistically significant. But,
most surprisingly, the co-efficient of LITR is negative, which shows contradiction to the theory. Major reason of
this is that most of the literate persons are traditionally qualified, not technically or professionally qualified. It
reveals the fact that the external debt may be utilized to teach the youth in a technical and productive way.
Now explaining the behaviors of the coefficients of the variables of Equation 4 of MODEL-B, we find that the
co-efficient of LTDSBN -3.384 shows strong and statistically significant impact on the MNFG. It, again,
demonstrates the fact that 1 billion increase in debt servicing expenditures may cause to reduce the MNFG by
3.384 percentage points. Here we have drawn this conclusion by not using EDLGDP variable in this equation of
the MODEL-B. It also concretes the conclusion drawn from Equation 3 that these are the debt servicing
expenditures which seriously harm the growth of industrial sector of the economy of Pakistan during the
1990s and 2000s. The results of other four predicting variables CINF, XPGDP, M2G and OPNS are according to
the theory.
Table 2: Parameter Estimates of Equations 3 and 4
(Dependent Variable is Manufacturing Sector Growth Rate)

Independent Variables Equation 3 Equation 4

-543.99 31.264
Intercept
(-2.637)** (2.291)**

External Debt and Liabilities to GDP Ratio 0.314

--------
(EDLGDP) (2.277)**
-3.385
Log of Total Debt servicing in Billion -5.969
(-2.823)*
Rupees (LTDSBN) (-4.172)*

-0.587 -0.636
CPI Inflation (CINF)
(-3.035)* (-2.982)*

3.052 0.449
Total Exports to GDP Ratio (XPGDP)
(3.454)* (0.458)

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

123.203
Log of Population in Millions (LPOPM) ---------
(2.615)**

-2.239
Unemployment Rate (UNEMP) ---------
(-2.483)**

National Savings as Percentage of 1.049

----------
GDP(NSAVG) (3.038)*

-1.503
Literacy Rate (LITR) ---------
(-2.082)***

0.118
Money Supply Growth Rate (M2G) ----------
(0.781)

-27.360
Trade Openness (OPNS) ---------
(0.462)

R-Squared 0.85 0.59

Adjusted R-Squared 0.76 0.45
D W Statistic 2.00 2.17
Sample Size 21 21
Note: The t-Statistics (in Parenthesis) significant at 1 %, 5% and 10% level are indicated by *, ** and ***
respectively. All the estimations are carried out by E-views 3.1 (Quantitative Micro Software).
MODEL- C (Equation 5):
2
The results of the estimated MODEL-C explain that this specified model is very well in terms of F-statistic, R
2
and DW Statistic. The value of R is 0.79, which explain that 79 percent variations in the unemployment rate of
the economy (UNEMP) are explained by the regressors of the estimated model.
All the estimated results of Equation 5 are arranged in the Table 3. The positive and significant coefficient of
EDLGDP shows that it is positively correlated with UNEMP. It implies that 1 percentage point increase in
EDLGDP causes to increase UNEMP by 0.11 percentage point. It is to infer that external debt and liabilities to
GDP ratio must be decreasing for the economy of Pakistan to increase the employment opportunities in the
economy. The coefficient of LPOPM is strong, positive and statistically significant at 1 percent level. It shows
that 1 million increase in population cause to increase UNEMP by 100 percentage pints. Whereas the negative
coefficients of LTDDMN and XPGDP show that these variables are negatively correlated with UNEMP. All other
explanatory variables i,e CINF and OPNS showed results according to the theory. All these results have been
tabulated in Table 3.
The notable point in discussed models A and B is that; CPI inflation has been found negatively correlated with
GDP and manufacturing sector growth of the economy. These results are found statistically significant.
Whereas it is found positively correlated with unemployment rate in the economy. Another worth noting point
is that the overall government deficit has negative effects on GDP of the economy.
Table 3: Parameter Estimates of Equation 5
(Dependent Variable is Unemployment Rate in the Economy)

Independent Variables Equation 3

-234.384
Intercept
(-3.855)*

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Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

External Debt and Liabilities to GDP 0.113

Ratio (EDLGDP) (2.611)**

Log of Total Debt servicing in Billion -18.329

Rupees (LTDSBN) (-3.632)*
Log of Population in Millions (LPOPM) 100.633
(3.778)*
0.002
CPI Inflation (CINF)
(-0.482)
Total Exports to GDP Ratio (XPGDP) -0.107
(-0.483)
-0.535
Trade Openness (OPNS)
(-0.058)

R-Squared 0.79

Adjusted R-Squared 0.70

D W Statistic 1.95

Sample Size 21
Note: The t-Statistics (in Parenthesis) significant at 1 %, 5% and
10% level are indicated by *, ** and *** respectively. All estimations
are carried out by E-views 3.1 (Quantitative Micro Software).
Trade openness has also been found the requirement to reduce unemployment in the economy of Pakistan.
Another variable directly linked with GDP and MNFG, and inversely related with unemployment rate is the
exports to GDP ratio. It is also found statistically significant.
6. Conclusion and Remedies for Future
This study has been an attempt to examine the external debt policy of Pakistan during 1990s and 2000s and to
investigate its ultimate impacts on developing economy of Pakistan. It is an attempt to investigate the effects
of foreign debt and liabilities and total debt servicing expenditures on the development of Pakistan. By
applying the OLS technique for econometric analysis on the secondary data for the period 1989-90 to 2009-10,
the study suggests that these are the actual expenditures on debt servicing which are mainly responsible for
the worst situation of less productivity, increasing unemployment and less contributing manufacturing sector
of the economy of Pakistan. Whereas the external debt and liabilities to GDP ratio is found positively related
with the growth of manufacturing sector. Weak but statistically significant relationship has also been found
between external debt and liabilities to GDP ratio and unemployment rate of the economy for the last two
decades. Total domestic debt has been investigated to have negative relation with unemployment rate in the
economy.
External debt and liabilities to GDP ratio has been found to have positive and statistically significant
relationship with the overall GDP levels of the economy in the period of last twenty years. But when this
variable has been replaced with the actual external debt in million rupees, along with some extra explanatory
variables, it showed negative impact on overall GDP of the economy. This impact has been found statistically
insignificant. On the basis of given theoretical and econometric analysis, the study strongly suggests the
following future remedies to the policy makers:
1) To try to reduce the expenditures on debt servicing. It can be achieved with the better professional
and skilled negotiation with the donor agencies and countries.
2) To efficiently allocate and to develop constraints to utilize the amount of external debt on more
productive and development expenditures. So that it might be a source of increase in net investment

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 Universal Journal of Management and Social Sciences Vol. 2, No.7; July 2012

in the country and, hence, to increase the exports of the economy and, further, to reduce the trade
deficit and overall government deficit.
3) To reduce the population growth rate, since it has been found to have significant positive correlation
with unemployment rate in the economy. This reduction in growth rate of population will not only
cause to improve per capita income of Pakistan, but also be helpful to improve the living standard of
the people.
4) To control the hyper inflation, and to make price stability sustainable with GDP growth rate of the
economy.
5) The external debt must be allocated to increase the technical skill and professional capabilities of the
people. So that they might be able to increase the manufacturing sector growth rate of the economy.
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