FOREIGN AID AND ITS IMPACT: A CASE STUDY OF PAKISTAN

The objective of this research paper is to investigate the impact of foreign aid on Pakistan’s economic growth. For this analysis we have taken growth rate of real GDP (gross domestic product) per capita as dependent variable while growth rate of capital stock, inflation, investment and official development assistance and aid received by Pakistan is taken as independent variables. A time series secondary data is taken from 1980 to 2012 from different sources like World Bank and world development indicators data base. In this research paper, OLS (ordinary least square) method was used. In order to remove the problem of non-stationarity auto-regressive (AR) and moving average (MA) techniques were used. The evidence shows that foreign aid has not brought positive impact on the economy of Pakistan. Foreign aid has negative relationship with inflation and gross domestic product (GDP) while domestic investment has positive and significant impact on economic growth of Pakistan. So it is suggested that instead of borrowing foreign aid Pakistan should promote domestic investment. Policy makers should keep in mind that stable and sustainable source of external financing such as export and foreign direct investment (FDI) can boost economic growth. If policy makers act on these suggestions then desired results can be achieved.