Impact of External Public Debt on Economic Growth: A Case Study of Bangladesh

Abstract

Purpose: The association between foreign (external) public debt and the economic growth has been studied extensively, with some studies showing a positive, others a negative relationship, and still others finding no significant relationship under any economic state. We choose this research with the aim to look at how Bangladesh’s foreign state debt affects economic growth. Materials and Methods: This research uses gross domestic product growth (proxy variable of economic growth) as the response (dependent) variable and foreign direct investment (FDI) inflow, export, import, and external debt as the independent variables utilizing time series data for the years 1961–2021. This study uses secondary data sources like World Bank macrotrends data for all econometric analysis. We employ the econometric technique of Augmented Dickey Fuller and Phillips Perron unit root test to check stationary property of dependent and independent variables, autoregressive distributed lag (ARDL) bound testing approach to show the long run association, and ECM for short run association. Results: Findings of this study reveal that Foreign (external) debt adversely affect economic growth, that is, if foreign public debt is increase in 1%, it decreases economic growth by 8.81% in the short-run. Moreover, ARDL bound testing approach indicates that there is a long-term association between foreign public debt and economic growth. Long-run results also indicate if external public debt is increased in 1%, it will result in a 2.60% decline growth. Moreover, the findings of the research also demonstrate that import, export, and FDI inflow possess an insignificant impact on growth. Implication: Academicians and researchers can use the findings of this study as reference. In addition, it also helps the policymakers to manage foreign public debt, focus on debt sustainability, diversify funding sources, strengthen fiscal management, etc.