Debt and Economic Growth in South Asia

After 1980s, in most developing countries, the rate of debt accumulation and increase in debt servicing are highlighted as major factors affecting the growth rate of output. Most of these countries lost their competitiveness in the international market mainly as a result of insufficient exchange rate adjustments. In addition, the weakening of terms of trade, economic mismanagement and crisis of governance also lowered growth rates in the developing countries. The downward pressure was larger in the countries facing higher debt burden as these countries faced higher interest rates, decline in the external resource inflow, lower export earnings, lower domestic output and lower imports. In case of South Asian countries, the external debt scenario has changed over time. According to World Bank (2001) Pakistan’s ranking worsened to ‘severely-indebted low income country’ from ‘moderately-indebted low income country’ in 1997, where as India’s ranking improved to ‘less indebted low income’ country from ‘moderately indebted’ in 1997. The rapid accumulation of debt, rising repayment burden and the economically and politically resource inflow or rescheduling motivated rescheduling of debt (as in case of Pakistan) has raised concerns regarding the impact of debt on the growth process of the South Asian countries. Khanobis and Bari (2001) claim that foreign resource inflow increased the resource availability and as a result it contributed to economic growth in South Asia. However, the study does not examine the effect of debt accumulation on economic growth. In this paper, given the diversity of growth experience, we examine the impact of rising debt burden on economic growth of South Asian countries.