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

Mohammad Aslam Chaudhary, Shahid Waseem Anjum


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.

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