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Nexus Among External Debt, Inflation, And Exchange Rate: A Time Series Analysis Of Pakistan
Sana Zaman and Rashid Nasir
IJED, Vol. 18 No. 2,
(2026)
Low-income countries often rely on external borrowing to bridge domestic financing gaps, and persistent debt accumulation may generate macroeconomic instability. This study examines the links among external debt, inflation, and the exchange rate in Pakistan from 1972 to 2022. To ensure a robust empirical analysis, the study uses unit root tests to check whether the variables are stationary, and then applies a Structural Vector Autoregression (SVAR) to examine the impact of changes in external debt. The results show a clear positive link between higher external debt and inflation, indicating that more debt is associated with higher inflationary pressures. Higher external debt also leads to a weaker real exchange rate, putting the local currency under pressure. The analysis finds that trade openness and debt volatility affect borrowing, while changes in exchange rates and interest rates explain most of the variations in inflation. These findings underscore the importance of coherent fiscal and monetary policies and sound debt management to maintain macroeconomic stability in Pakistan.
Keywords: External Debt, Inflation, Exchange Rate, SVAR, Pakistan. JEL Code: E31, F34, F41, C32
