Kahingalage, Kalani Prasanga (2025) Economics of External Debt: A Risk Management Perspective of South Asian Countries. PhD thesis, Victoria University.

Abstract

External debt has emerged as a critical challenge for South Asian countries, threatening long-term economic growth and financial stability. In this context, effective debt management is essential to avert potential financial crises and to maintain macroeconomic resilience across the region. While previous studies have examined external debt in South Asia, many have concentrated predominantly on aggregate macroeconomic indicators, often overlooking the diverse geographic, institutional, and economic contexts specific to each country. This study addresses these critical gaps through a comprehensive investigation into the determinants and risks of external debt in South Asian countries, namely Bangladesh, India, Nepal, Pakistan, the Maldives, and SriLanka and its implications for economic growth. Specifically, it examines key macroeconomic and institutional factors influencing external debt, evaluates associated risks across varying debt levels, and proposes a country-sensitive, risk-informed debt management framework tailored to the region’s unique context. To achieve these objectives, the study uses secondary data from 2002 to 2021, drawn from the World Bank’s World Development Indicators, Reserve Bank annual reports, and stock market publications. The dataset comprises 120 observations representing six South Asian countries. The dynamic panel regression models, particularly the Fully Modified Ordinary Least Squares (FMOLS) technique, is employed to explore the determinants of external debt. The Random Effects model explores the external debt-growth relationship, complemented by Pairwise Dumitrescu–Hurlin panel causality tests to assess causality directions and Quantile Regression analysis to evaluate debt risks at varying levels. Key findings reveal a long-term relationship between external debt and explanatory variables. Trade balance, oil imports, debt servicing, foreign remittances, political stability, and unemployment are positively correlated with external debt, while foreign direct investment, government reserves, return on assets, control of corruption, and the stock market index show negative correlations. The analysis also indicates that, before and after the global financial crisis, the previous year’s external debt strongly predicts the current year’s debt, reflecting a persistent debt accumulation trend in the region. Quantile regression results show that the influence of key variables varies across debt levels. Control of corruption and debt servicing remain significant risk factors at both low and high debt levels. Foreign remittances, political stability, and stock market performance are risk factors at lower debt levels but help reduce debt at higher levels. Government reserves are effective in reducing debt only at lower levels, while oil imports and return on assets help reduce debt at higher levels. Additionally, the study finds a negative impact of external debt on economic growth, with evidence of both homogeneous and heterogeneous causal relationships across countries. Drawing on these insights, the study proposes a comprehensive, risk-based debt management framework that incorporates macroeconomic conditions, institutional governance, and country-specific contexts. This framework offers practical guidance for policymakers in developing sustainable, tailored strategies to manage external debt while enhancing economic resilience. By identifying nuanced risk factors and recognising the dynamic nature of debt accumulation, this research contributes new knowledge to the existing literature and provides actionable recommendations for improving debt governance in South Asia.

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