Impact of Debt Servicing on Fiscal Deficit in Pakistan
DOI:
https://doi.org/10.54938/ijemdss.2026.05.1.737Keywords:
GDP, External debt service, Internal debt service, Current expenditures, Development expendituresAbstract
This study examines how debt servicing affects Pakistan’s fiscal deficit and compares the effects of internal versus external debt servicing. Using annual time-series data from 1980 to 2019, two models are estimated, with internal and external debt servicing as the key explanatory variables, respectively, alongside GDP growth, current expenditures, and development expenditures. The Augmented Dickey-Fuller (ADF) test assesses variable stationarity, while the Autoregressive Distributed Lag (ARDL) approach tests for cointegration and estimates short- and long-run relationships. The results confirm strong cointegration in both models. In the first model, internal debt servicing, current expenditures, and development expenditures positively affect the fiscal deficit, whereas GDP growth has a negative effect. In the second model, external debt servicing and GDP growth have negative long-run effects on the fiscal deficit, while current expenditures have a positive effect; development expenditures have no significant effect. The findings suggest that controlling unnecessary government expenditures, improving revenue mobilization through taxation, and directing borrowed funds toward productive development projects can strengthen revenue-generating capacity and reduce the fiscal burden of debt servicing.
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