Pakistan Institute of Development Economics



Options for Financing the Budgetary Deficit, Money Supply, andGrowth of Banking Sector

Author: A.R. Kemal

The fiscal deficit has assumed alarming proportions inPakistan; it was as large as 8.5 percent of the GDP in 1987-88. Thoughit has fallen somewhat in recent years, yet it still is around 6.7percent of GDP. While the fiscal deficit was expected to result in ahigh rate of inflation and slow growth of output, Pakistan has sustaineda high growth rate of output with price stability. This makes Pakistan afascinating case study.l The impact of the fiscal deficit on monetaryexpansion, growth of output and price stability in various countries hasbeen extensively analysed. For example, see Cline (1987); Collins andPark (1989), Corbo (1985,1989); Corbo and de Melo (1989); Corbo and Nam(1988); Dornbusch and de Pablo (1989); Easterly (1989); Edwards (1989);Enders and Mattione (1984); Gil Diaz (1988); Haque (1987); Kim and Yun(1988); Kormendi (1983); Modigliani and Sterling (1986); Nash (1988);Ocampo (1987); Reisen and van Trotsenburg (1988); van Wijnbergen (1987)and Yellen (1989). However, very little work is available on Pakistan.The present study is an attempt to fill that important gap. By analysingtrends in the budgetary deficit and in the pattern of financing thedeficit, the present study explores their implications for the interestrate structure, monetary expansion, and growth of the banking sector inPakistan. The paper is divided into four sections. Section I traces thetrends in the fiscal deficit over time. Patterns of financing thedeficit and implications for monetary expansion are analysed in SectionII. Section III examines the implications of changes in the ratestructure of interest for the growth of money supply and the bankingsector. Section IV presents the main conclusions of thestudy.

A.R. Kemal

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