Role of External Debt and Trade Deficit in Economic Performance of Pakistan

Abstract

The purpose of this study is to examine influence of trade deficit and external debt on performance of economy of Pakistan during 1980- 2017. GDP is used as dependent variables while trade deficit, gross capital formation, exchange rate, labor force, manufacturing value added and total external debt are used as explanatory variable. The short-run, long-run association and stationarity of data amongst variables are obtained by applying vector error correction technique and Johansen Co-integration test. The study reveals that there is a statically important and negative influence of the trade deficit on GDP while total external debt also has a harmful impact on GDP. Moreover, results show that there is an optimistic and noteworthy connection among gross capital formation and GDP and Gross domestic product is positively influenced by Exchange rate, labor force and manufacturing value added. The association between total external debt and gross domestic product is negative and significant, it means when total external debit increases gross domestic product decrease. Government of Pakistan should create persistent strategies marked at differentiating economic actions so as to give nation prosperous sources of budget financing instead of trusting much on external borrowings.