Indebtedness and Poverty: The Case of Pakistan

Since the advent of Neolibralism, debt has been construed asmeans of policy reforms to achieve stability, liberalisation andrecovery from shocks. However, the other side of the picture has beeneither ignored or underappreciated. That is the human cost ofindebtedness. Whether internal or external, indebtedness may havesignificant implications for the living conditions of the masses, as itleads to substantial deviation of resources towards debt management.This paper attempts to assess the impact of indebtedness on poverty forPakistan. The impact of total, internal and external debt on poverty hasbeen evaluated separately. Using the data from 1973 to 2013, JohansenCo-nintegration test reveals long run relationship between debt andpoverty. The results remain consistent when domestic and external debtis taken separately. The long run impact of total, internal and externaldebt on poverty is positive. Which means that for Pakistan debt leads toincrease in poverty. Further, it is evident that domestic debt has moresevere poverty implications as compared to external debt. These resultshave two important policy implications; firstly, the overall levels ofdebt have to be reduced and secondly, the issue of domestic debtreduction takes priority. JEL Classification: I30, I38, F34, H36Keywords: External Debt, Domestic Debt, Poverty, JohansonCointegration