THE RELATIONSHIP BETWEEN EXTERNAL DEBT AND DOMESTIC INVESTMENT AND ITS IMPACT ON ECONOMIC DEVELOPMENT IN IRAQ: THE PERIOD 2004–2024

Аннотация

This research aims at finding the relation between external debt and domestic investment and understanding the impact they have on the development of the Iraqi economy. For this purpose, the Autoregressive Distributed Lag (ARDL) model was used to estimate the short run and the long run relationships of the study variables. The empirical results show that external debt has no statistically significant impact on economic growth in the long term. Gross capital formation, as a proxy for domestic investment, however, has a negative and statistically significant effect on the GDP growth rate in the long run, indicating that domestic investment was not effective in contributing to economic growth during the study period. The impact of external debt and domestic investment on economic growth is positive but not significant statistically in the long term. As far as the control variables are concerned, there is no statistically significant long run effect of the exchange rate on growth, however, the short run effect of the exchange rate on growth is negative and significant. The negative and statistically highly significant impact of inflation on economic growth in both the short and long run is an indicator of the negative impact of chronic inflationary pressures. But, government spending has a positive effect and statistically significant on economic growth in two periods, which highlights the importance of fiscal policy in stimulating economic activity. Oil prices also have a positive and statistically significant long run effect on economic growth. Moreover, the negative and statistically significant error correction coefficient supports the hypothesis of a stable long run relationship between the variables which is confirmed by the error correction model. The estimated coefficient reveals that about 68.98% of the disequilibrium gets corrected within one period, that is, the process of adjustment towards the long-run equilibrium path is relatively fast. Based on the results of the study, the following recommendations can be made: Improving the efficiency and productivity of the domestic investment, redirecting external borrowing to productive activities, controlling the inflationary pressures in the economy, and increasing the efficiency of government spending and utilization of oil revenues to achieve economic diversification and sustainable economic development for Iraq.