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Macroeconomic Policies and Management of Debt, Deficit, and Inflation in Pakistan

Mohammad Aslam Chaudhary and Shahid Waseem Anjum
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Mohammad Aslam Chaudhary: Department of Economics, Quaid-i-Azam University, Islamabad.
Shahid Waseem Anjum: Department of Economics, Quaid-i-Azam University, Islamabad.

The Pakistan Development Review, 1996, vol. 35, issue 4, 773-786

Abstract: The study attempts to analyse the sustainability of fiscal policy in Pakistan. Alternative foreign debt and domestic debt strategies were analysed for formulating meaningful policy guidelines. Such analysis was made consistent with other macro-economic variables like growth of GNP, inflation, and interest rates on debt. Alongwith the identifications of sustainable deficit, required deficit reduction in the actual fiscal deficit under appropriate assumptions was also estimated for three time periods: the 1980s, 1985–95 (recent past), and 1993–98 (the 8th plan period). The averages of the sustainable deficits for the above- cited periods under alterantive scenarios were estimated by utilising a sustainable deficit model for Pakistan. Our empirical findings indicate that Pakistan has been following such macro-economic policies pertaining to fiscal deficit as are not consistent with sustainable deficit. For instance, during the 1980s, deficit of about 4.2 percent of GNP was sustainable against the actual fiscal deficit of 6.5 percent. During the recent past, sustainable deficit was about 5.4 percent of GNP against the actual deficit of 7.4 percent. It was planned that during 1993–98, fiscal deficit will be restricted to 5.5 percent of GNP and GNP growth was expected 7 percent per annum. However, during the first three years of the 8th plan, GNP growth was only 3.6 percent per annum. Our estimates indicated that sustainable fiscal deficit was only 2.7 percent of GNP for this period, given the above actual growth of the economy. The above discussion provides important information regarding unsustainability of fiscal deficit in Pakistan. Throughout the period under analysis, fiscal deficit was not sustainable. As a result, negative impacts of fiscal deficit on the economy were bound to emerge. Our findings regarding sustainability of fiscal deficit have important bearing on macroeconomic policies. Inflation, unemployment, increasing burden of debt and debt-servicing are linked with fiscal deficit. Thus, there is a need to keep the fiscal deficit within a limit; consistent with other macro-economic variables like inflation and debt, etc. Doing so may help to stabilise the economy and to solve the related economic problems. In brief, fiscal deficit need to be reduced for sustainability of the fiscal system and for stable economic growth.

Date: 1996
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