Effect of Public Debt on Economic Growth of Nepal

The study investigates the effect of public debt on economic growth of Nepal over the period 1990 to 2024. The main objective of this study is to examine the effect of public debt on the economic growth of Nepal. The study considers external debt and internal debt as independent variables, gross capital formation and inflation rate as control variables, and GDP as the dependent variable. It utilizes secondary panel data from ten major commercial banks in Nepal. The results indicate that external debt has a positive and significant impact on GDP growth both in the short and long term, implying that external borrowing contributes to sustained economic development. In contrast, internal debt shows a negative effect on economic growth in the short run and an insignificant effect in the long run, suggesting that domestic borrowing may create short-term economic pressure. The effect of inflation appears mixed: current inflation does not significantly influence growth, but lagged inflation negatively affects GDP, indicating delayed harmful effects of rising prices.