Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries

This paper examines the impact of military expenditure and economic growth on external debt for a panel of five selected SAARC countries including Bangladesh, India, Nepal, Pakistan and Srilanka, over the period of 1988-2008. Using Pedroni's (2004) test for panel cointegration, it was found that there is a long-run relationship between external debt, economic growth and military expenditure. The study finds that external debt is elastic with respect to military expenditure in the long run and inelastic in the short run. In the long run, 1% increase in military expenditure increase external debt between 1.18 % and 1.24%, while 1% increases in economic growth reduce external debt between 0.64% and 0.79%, by employed DOLS and FMOLS estimator respectively. In the short run, 1% increase in military expenditure increases external debt by 0.15%, while 1% increase in economic growth reduces external debt by 0.47 %.