AN INVESTIGATION ON IMPACT OF TRADE OPENNESS & BUDGET DEFICIT ON PAKISTAN'S PUBLIC DEBT: ARDL APPROACH TO COINTEGRATION

Abstract

In this empirical research, the purpose was to investigate the impact of trade openness and budget deficits on public debt in Pakistan. In this regard, data was examined spanning from 1975 to 2020. To map both long-run and short -run interactions, we used the autoregressive distributed lag (ARDL) method of co-integration along with ECM approaches. The results show that variables such as public debt, budget deficit, trade openness, and inflation have long- and short-term co-integration. Also, trade openness’s coefficient’s negative sign with value of -0.759 confirms negative relationship between public debt, trade openness and shows that a 1% upsurge in trade openness will bring a 75.9% decrease in public debt’s growth in Pakistan. While budget deficit and inflation both possess a positive sign of coefficients and a positive link with public debt, the coefficient of budget deficit is 0.498, which depicts that a 1% escalation in budget deficit will lead to a rise in public debt of 49.8 percent. In conclusion, Pakistan's national debt is rising due to budget deficit & inflation, but it is falling due to trade openness. To reduce budget deficit, government should balance domestic & external debt so as to sustain desired position. So, it is suggested the government actively trade internationally to minimize the public debt.