Influence of Key Aggregates of External Debt on the Economic Growth & Development of Bangladesh: An Econometric Analysis

Abstract

As a developing country, Bangladesh is largely dependent on external debt for its infrastructural development projects, which certainly signifies the overall indicator for the development of accelerating economic growth. Therefore, the study aims to investigate the effect of key aggregates involved in external debt, such as debt service payments, external reserves, and interest rates, on the gross domestic product (GDP) of Bangladesh. The study involves time series data on the selected variables from 1992 to 2023 and applies the ordinary least square (OLS) model with the variables to be tested through the Breusch-Pagan/ CookWeisberg test for heteroskedasticity. Also, for testing the multicollinearity, the Variance Inflation Factor (VIF) and Pearson Correlation Matrix (PCM) tests have been used. The analyses show that GDP has a strong positive relationship with Debt Service Payment and External Reserves while a negative relationship with the interest rate, each at a 5% significance level., Finally, it is recommended that, to cultivate the positive impact of foreign debt, channeling the borrowed fund into export-promotional ventures or profitability of the invested venture to lessen the negative effect of debt service payments, the optimal debt level shall be determined up to the good risk position of external reserves maintaining a stable foreign exchange ratio and capital formation in the domestic debt market encouraging private investments at lower interest rate ensuring an efficient debt management policy within the country shall be implemented.