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

A. R. Kemal

Abstract


The fiscal deficit has assumed alarming proportions in
Pakistan; it was as large as 8.5 percent of the GDP in 1987-88. Though
it has fallen somewhat in recent years, yet it still is around 6.7
percent of GDP. While the fiscal deficit was expected to result in a
high rate of inflation and slow growth of output, Pakistan has sustained
a high growth rate of output with price stability. This makes Pakistan a
fascinating case study.l The impact of the fiscal deficit on monetary
expansion, growth of output and price stability in various countries has
been extensively analysed. For example, see Cline (1987); Collins and
Park (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 analysing
trends in the budgetary deficit and in the pattern of financing the
deficit, the present study explores their implications for the interest
rate structure, monetary expansion, and growth of the banking sector in
Pakistan. The paper is divided into four sections. Section I traces the
trends in the fiscal deficit over time. Patterns of financing the
deficit and implications for monetary expansion are analysed in Section
II. Section III examines the implications of changes in the rate
structure of interest for the growth of money supply and the banking
sector. Section IV presents the main conclusions of the
study.

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DOI: https://doi.org/10.30541/v30i4IIpp.769-784

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