The Impact of External Debt on Economic Growth: Empirical Evidence from Iraq

Iraq has great potential of different resource that may not be available in other countries. The Iraq is one of the areas that have diversity in terms of natural resources and industrial components that date back to thousands of years. Problem Statement From the latter half of the 1970s to the early 1980s, the Iraqi economy encountered no problems with foreign currency because of the strength of the economy and the huge returns achieved from the export of oil, however since the Iraq-Iran war, Iraq has suffered from a budget deficit because of the earlier war funding Iraqs history of war, as well as its economic blockade conditions, have contributed to this situation. At present, political and security instability continue to occur. Thus, the government stimulated to borrow from developed countries as well as an international organization to satisfy and meet their local requirements. Significance of the study The identification and explain why external debt exists as well as determine the nature and extent of relationship between external debt and economic growth of Iraq. Objective This paper attempts to identify and analysis of the negative impacts of external debts on economic growth currently and in the future in the case of Iraq. Methodology To achieve this Objective of fulfilling its full potential, present paper adopts ARDL approach to estimate the level of co-integration and relationships between external debt and economic growth as discussed in Pesaran and Shin (1999), and the secondary data for the period of (1980-2014) was used. Results The empirical result shows that war, political and security instability had negative impacts on both size of external debt and direction of economic growth of Iraq. Findings This study also found that external debt had a negative impact on gross domestic product (GDP), but this impact in the short-run had a bigger compared to the long-run. Conclusion This study highlights the reason for the external debt of Iraq. Suggestion Thus, Iraq government should be given the opportunity to extensively develop the agriculture and industrial sectors, which are important factors to meet the growing gross domestic product (GDP) without depend mainly on oil sector which is directly and indirectly cause to external debt. Contribution of the Study To the best knowledge of these researchers, no current literature on external debt in Iraq had analyzed long- and short-run relationships. Furthermore, no current literature on Iraqi external debt used new approach, such as ARDL. Thus, the current study is going to fill up some gap by adding at least one more empirical study to the existing number of articles. Our empirical results enable us to find how much the economic growth is influenced by external debt of Iraq in the short and long-term.