International Research Journal of Finance and Economics ISSN 1450-2887 Issue 106 (2013) http://www.internationalresearchjournaloffinanceandeconomics.com Does External Indebtness Enhance the Incidence of Poverty in Pakistan? An Empirical Evidence Muhammad Ramzan Sheikh Corresponding Author, Lecturer, Department of Economics Bahauddin Zakariya University, Multan Pakistan E-mail: ramzansheikh@bzu.edu.pk Tanvir Alam Lecturer, Department of Economics Government College of Science, Multan Pakistan E-mail: iamtanvir@hotmail.com Abstract Almost all the developing countries including Pakistan are relying on foreign recourses because these countries do not have so much domestic resources to fill their internal and external gaps. So, it is a vital question to explore that whether the dependence on foreign loans is adding poverty or not. The paper examines the impact of external debt on the incidence of poverty in Pakistan using OLS technique for the period 1985-2010. The study observes that external debt and external debt servicing enhance the poverty level in Pakistan. The effect of the volume of external debt and external debt servicing on poverty is found positive and statistically significant. The reason of this result may be that an increase in external debt and especially external debt servicing soaks up government revenues which lessen government’s capacity to spend more on development projects to reduce poverty. In the end, the study also offers some polices to trim down the dependence on external debt. Keywords: External debt, External debt servicing, Poverty, Per-capita real GDP JEL Classification Codes: H63, I32 I. Introduction All economies and particularly less developed economies are much more concerned with attaining sustainable growth. These economies usually face escalating fiscal and trade deficits largely driven by higher levels of external debt and external debt servicing. Pakistan, being the developing economy, is also facing the same problems. Pakistan has experienced serious debt problems in the recent past and accordingly witnessed deterioration in the macroeconomic environment, leading to deceleration in investment rate and economic growth and the associated rise in the incidence of poverty [Government of Pakistan, Economic survey 2010-2011]. Now a days, economists have paid attention to explore the relationship between external debt and poverty. There is a little literature on the topic concerned. This paper is an attempt to investigate whether external debt has increased the incidence of poverty in Pakistan. External debt may be a key reason of poverty through its effects on economic growth and human development. The mechanism or link between external debt and poverty is complex demonstrate the multifaceted aspects of poverty. The crowding out effect of debt servicing on social