Managing External Debt for Economic Growth: Evidence from South Asia Region

Abstract

The burden of foreign debt is a recurrent phenomenon in the fiscal landscape of economies, and it is a key challenge that developing nations frequently face. Every economy uses external debt as a source of finance for capital formation. Previous studies on the relationship between economic growth and external debt lack a nuanced examination of the diverse economic structures and policy frameworks but contribution of current study is focused on the economic structures and policy frameworks, across South Asia Regions. The primary goal of this research is to examine the effect of foreign debt on economic growth. To identify connections between variables, this study utilized a fixed-effect regression model. The predicted variable of this study is economic growth while the predictor variables are external debt, inflation, gross national expenditure, and population growth rate. This study collected data from the world development indicators for the South Asia Region from 1990 to 2019. Ricardo's public debt theory and the debt overhang theory serve as theoretical frameworks for investigating the influence of foreign debt on economic growth. The diagnostic test showed the problem of heteroscedasticity and autocorrelation in the estimated model, therefore, robust estimation is carried out. The government should transparently manage the entire loan phase, including project identification, evaluation permits, and loan negotiations and contracting loan distribution, completion of the project monitoring and assessment, and repayment of loans. The government ought to develop a framework of credible policies to foster an environment that will promote confidence among investors, both domestic and foreign, to make investments in the nation.