Impact of Foreign Debt on Savings and Investment in Pakistan

This paper investigates the impact of foreign debt on savings and investment in Pakistan using time series econometric tools for the period 1973-2006. Annual data for the real savings, real interest rate on bank deposits, real gross domestic product, real foreign debt, real debt servicing on foreign debt, real investment and growth rate of real gross domestic product. We first examine the stationarity of the variables using augmented Dickey-Fuller test. Real gross domestic product and its growth rate were found stationer at level 5 percent. All other variables were found stationer at first difference. A cointegration analysis of the models can not be carried out because residuals of the models are not stationary at level and have not the same order. To avoid the results of spurious regressions, multivariable regression analysis is carried out by considering their respective orders of the differences of the series. According to the empirical results, there is partial evidence that foreign debt contributed favorably to investment expenditures and savings in Pakistan. Finally, it can be concluded that governance mechanism for the use and monitoring of funds generated through external borrowing needs much ardent improvement because of its strong and significant impact on savings and investment.