An Analysis of Budget Deficits, Debt Accumulation, and Debt Instability

Faiz Bilquees


In Pakistan all the macro indicators have been adversely
affected by the persistently high deficits and the strategy adopted to
finance them in the last two decades. The excessive domestic borrowing
at high rates to finance deficits without any attempts at domestic
resource mobilisation and controlling of the deficits over extended
periods absorbed all available domestic and external resources. The
resulting debttrap led to increased external borrowings at high rates
with short-term maturity. This, coupled with massive exchange rate
depreciation throughout the last two decades, resulted in rapid debt
accumulation. The recent fiscal space created in the wake of events of
9/11, resulting in high reserves, follows considerable debt relief and
availability of massive funds on very soft terms. However, the decline
in budget deficit continues to occur at the expense of development
expenditure, along with some increase in tax revenues. This trend in
expenditure needs to be reversed if serious progress in debt reduction
is the aim.

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