Managing External Debt For Sustainable 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.