EFFECTS OF CAPITAL INFLOWS ON FISCAL BALANCE IN AN EMERGING ECONOMY: EVIDENCE FROM PAKISTAN

Muhammad Zakaria (), Wen Jun () and Arooj Khan ()
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Muhammad Zakaria: School of Economics and Finance, Xi’an Jiaotong University, Xi’an, Shaanxi, P. R. China
Wen Jun: School of Economics and Finance, Xi’an Jiaotong University, Xi’an, Shaanxi, P. R. China
Arooj Khan: Department of Management Sciences, COMSATS University Islamabad, Islamabad, Pakistan

The Singapore Economic Review (SER), 2023, vol. 68, issue 05, 1585-1598

Abstract: This paper examines the effect of capital inflows on fiscal deficit in an emerging economy of Pakistan. To obtain this objective, a fiscal deficit model is estimated using annual data for the period 1984–2017. The model is estimated using Generalized Method of Moments (GMM) technique. Three measures of capital inflow variables are taken, i.e., remittances, foreign direct investment (FDI) and foreign debt. The findings reveal that capital inflows increase fiscal deficit in the country. The findings show that 1% increase in remittances will increase fiscal deficit by 0.312%, while 1% increase in FDI will deteriorate budget deficit by 0.250%. Similarly, 1% increase in foreign debt will worsen fiscal balance by 0.073%. Remittances and FDI have more effect on fiscal deficit compared to foreign debt. It implies that both remittances and foreign debt deteriorate fiscal balance in the country more than foreign debt. The study suggests that remittances, FDI and foreign debt should be used for productive purposes as they will help in improving fiscal balance in the country.

Keywords: Fiscal balance; capital inflows; Pakistan (search for similar items in EconPapers)
JEL-codes: C32 F24 H62 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S0217590819500474

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