Breaking out of Pakistan’s Stop-Go Economic Cycles: Do the “Twin” Fiscal and Current Account Deficits Hold the Key? 1999-2019

Rashid Amjad and Almazia Shahzad

MPRA Paper from University Library of Munich, Germany

Abstract: Pakistan’s overall economic growth patterns since 1950 have been cyclical with periods of low economic growth in the 1950s and 1970s interspersed with periods of high economic growth in the 1960s and 1980s. Since 1990, however, these stop-go economic cycles have been recurring more frequently and the duration of expansionary spurts have decreased while those of low economic or stagnant growth increased in years. The reasons for this post-1990 slow down have been a subject of considerable debate and discussion especially since Pakistan has been during at least half of this period under a dozen IMF programs of varying durations with only two being successfully completed and the rest being abandoned during their duration. The aim of this paper is two-fold. The first to review Pakistan’s economic performance during 1999-2018, identify the main growth trends and factors responsible for the overall poor growth performance in the period, except for a brief growth spurt during 2003-06. The second more specifically to analyze the role of the twin fiscal and current account deficits as the major factors in explaining this poor stop-go economic performance. We test the impact of the twin deficits on overall economic growth for the years 1980 – 2018. Our results confirm that the twin deficits have a negative impact on economic growth. Between the two deficits, the fiscal deficit contributes more to the slowdown of the economy than the current account deficit. We conclude that economic policy makers in Pakistan, to break-out of the recurring stop-go cycles, must aim for the adoption of a policy of running of low and targeted level of the fiscal deficit.

Keywords: Macroeconomic Policy; Study of Policy Episodes; Stop-Go Cycles (search for similar items in EconPapers)
JEL-codes: E65 (search for similar items in EconPapers)
Date: 2019
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Published in Pakistan Economic Management and Policy Series No.01.01(2019): pp. 17-31

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