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INTRODUCTION The two gap theory suggests that the developing countries have to rely heavily on foreign capital in flows FCI s to fill two gaps the import export gap and the savings investment gapDespite the fact that all developing countries need FCIs for their development the volume the type Grants Loans Foreign direct investment Export credit Project non-project assistance Technical assistance etc Of these flows vary The country size and the state of economic development mainly determines the size and type of FCIs As a less developed country Pakistan has long been relying on foreign aid and has been the largest recipient of foreign direct investment More over the external debt situation of an individual country may not seem to be interesting when analyzed from an international perspective For example the external debt situation of a south Asian country as Pakistan The external debt situation of this individual country has strong repercussions on their development Debt is the largest capital in flow in Pakistan and it has played a critical role in the country development The trends and pattern and the terms of have changed much in recent years Pakistan lacks physical financial and human capital infrastructure and political and macro economic stability Its economic structure remains in flexible and foreign transactions are regulated ADVANTAGES AND DISADVANTAGES OF DEBT On one hand the debt augments the domestic resources of the recipient helps to promote growth and structural transformation assists to over come the balance of payments and government budget deficits transfers advanced technology and improves human resources On the other hand foreign aid may distort domestic savings introduce in appropriate technology and increase the
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