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Relationship Between Fiscal Deficit And Economic Growth Economics Essay

Now a days public debt is the internationally occurs. It is major part of the fiscal sectors of major economies. In the view of modern economist the public dent is not major issue, but the problem is the mismanagement and inappropriate use of the public debt. The modern theory of public debt differentiates the basic relationship between the economic growth / stability and the debt growth / sustainability in the country. The inappropriate debt organization and a consistent and unlimited growth of the debt to GDP ratio may lead negative impression in the macroeconomics and are the major macroeconomics indicators are curtailing the investment activities, misbalancing of the financial system, pressure of the inflation and fluctuations in the exchange rates etc...

There are huge debt problems that the Pakistan are facing now a days, which may creates hurdles in the future of Pakistan’s economy. And these hurdles / obstacles exist over the decades. There are balloon external foreign payments in shape of debt and service payments, which cannot be met by internal resources therefore; theses payments can be made with the assistance from INTERNATIONAL MONETARY FUND (IMF), WORLD BANK, ASIAN DEVELOPMENT BANK (ADB) and debt from PARIS CLUB. It has been noted that there are also some gigantic pubic debt burden (i.e., public portion of external debt and foreign exchange liabilities) debt service payments contribute to 60% of government revenues. By rational calculation of debt burden, (such as in relation to debt stock to GDP, exports, government revenues - or flow ratios - such as ratio of public debt service payments to government revenues or ratio of external debt payments to foreign exchange earnings), Pakistan’s debt loads are outside sustainable limits.

When the government resolve to cope the expenditure by borrowing money instead of increasing the tax rates on the general public, it will creates liability on the government as is known as Public Debt. Whenever the government takes debts to meet its expenditure, the liability of that will eventually transfer to the coming generations. Debt management is the cycle of establishment and implementation of government debt in order to gain the require amount of financial support, obtain its menace and cost objectives and to meet any debt management goals. The government has to establish and maintain a favorable market for government securities.

As a result the debt financing policy provides the entire budget to the current generation and the deficit burden will be shifted to the next generation. Debt management is the cycle under which the government obtains and uses the debt proficiently and successfully. Government can obtain the debt by using four main sources viz., state bank, commercial banks, from the non bank i.e., private sectors and finally the foreign sources. To cope with the expenditure the government may uses the funds by increasing the tax rates or by receiving the debts. And these debts are the liability of the government which has to pay by the coming generations. However, these debts become the government burden when it is not effectively utilized. As a result the debt becomes the unmanageable and unsustainable. Sustained debts are those debts where debt to income ratio decreases at least, remains the same over the period of years. There is a prescribe replica in literature on public debt it determines the features contributing in its un sustainability. Debt is controllable when the costs of debts are rationally low and debt thus acquired for the efficiently used for the national interest over the long period of time.

Debt is effective, when the ratio of debt services to the total income and foreign debt services to export full or remain the same.

In case of Pakistan the debt is mismanaged, because, here the policy are mainly focus on new and cheap sources of funding instead of efficient implication of the debt.

There are mainly four causes of mismanagement of debts in Pakistan viz., the contributor’s countries or institutional’s plan, governmental institutes of the country, curtailing of capital, and finally the negative effect of debt to the national savings.

After a brief introduction now we are going to present the structure of this report that how it is organize and what is the present public debt situation in Pakistan and how the Pakistan public debt will be analyzed.


The objectives of this study are as follows:

To find out the relationship between fiscal deficit and economic growth.

To analyze the factors running behind the fiscal deficit.

To analyze and study the debt management strategy in Pakistan.


There exist a strong relationship between fiscal deficits and Economic growth.

1.4 Research Methodology

1.4.1 Secondary Data Collection

Secondary data shall be collected from consulting the newspaper reports, official reports and published papers and books. This data shall be collected from different sources acquired from the Central bank of Pakistan including annual reports, bank manuals and the banks official websites. Other sources of secondary data shall include, Ministry of Finance, Digital Library of HEC, and Economic Survey of Pakistan etc. In order to be able to discuss and analyze the fiscal debt policies running in Pakistan and their cumulative, impact on the economic growth and wellbeing of Pakistan.

1.4.2 Scope and Significance

Public debt plays a vital role in the development and economic growth of a nation. The proper administration of these debts has proven to be a significant element in some successful economic growths of some Asian nations like India, Malaysia and Indonesia. This study shall analyze the system of public debt management and its impacts on the Pakistani economy and it shall help us suggesting and highlighting the loopholes of the system.


Although this is a very wide subject and to wrap this subject in short period of few months is not possible, so the first restriction is the time restriction. The second restriction is of the availability of the data. I have collected some of the very important data from the library.

1.6 Organization of Study

The study is organized as follows:

In first chapter, the brief introduction is given.

Second chapter contains the literature review.

Third chapter contains debt management objectives and functions.

In fourth chapter the qualitative analysis of fiscal deficit and Economic Growth is given with some tables and the analysis of debt burden and its effect on the economic growth.

Fifth chapter is conclusions and recommendations for further studies.



According to Kemal (2002) whenever a country receiving foreign borrowing and then utilized inappropriate way the consequence of this may create a stern debt service obligation and as a result the debt of the country mount up day by day which is the main barrier for the future economic policy, same is the case with Pakistan.

As Per Kemal (2002) observation regarding the Pakistan's horrifying debt finance, that there are mainly four grounds of the indecent application of debt i.e., the donor's plan, corruption, capital flight and the unfavorable effect of loan on domestic savings.

According to the GOP (2001) there is necessary to solve the issue of debt financing problem in Pakistan, if not, it will siege the economic growth and will have negative effect at the macroeconomic level of the country.

According to the Siddiqui and Malik (2002) report, there is inverse relationship among the debt accumulation and the economic growth of the country. However initially the foreign debt has favorable effect on the economy but after a threshold the effect becomes the unfavorable. Foreign debts increase the resource availability as in the practical case of economic growth in South Asia.

Fan (2007) remarked that Pakistan has entered the 21st century with a public debt burden that surpassed 90% of the total GDP. Afterwards, due to the upgrading of macroeconomic indicators public debt to GDP ratio cut-down to 26-2%. The main cause was that the external and public debt of the country raised slower as compared to the GDO.

Ishfaq (2004) found that the foreign assisted funds has not contributed positively to the GDP growth and income in equal ratio, although that it has positive effect to control poverty, but was limited for some time. The ineffectiveness of aid can be attributed to inverse diversion of foreign aided funds to non-productive activities and improper resource allocation particularly in the general public sector. Any way he comments that foreign aid has been active in assisting the growth rate in consumption that otherwise would not have been possible. Furthermore foreign aid and external borrowing makes the increase in funds resource as a result the country may evade heavy taxes…

According to the Hanif (2002) observed the matter of running public debt and analyses the current state of public debt in Pakistan and found that in Pakistan, due to inappropriate use of debt, the debt management becomes serious problem. Continually mismanagement of debt made it unsustainable, which is intimidating to cause additional retard in the declining growth rate of the country. Although, current exercises of debt restructuring has improved some short run debt burden indicators, but couldn't improve our debt to GDP ratio. It is anticipated that these reshuffling will assist us in improving the investment and may increase the growth.

Gul (2008) comments, public debts are important source of covering government financial gaps. Efficient and well-organized implication of public debt can grow economic growth. Although there is extreme dependence on public debt may hoists macroeconomic problems. Since, there is huge crack between revenue and expenditure of the economy that compels the country to get debt. And these debts can further deteriorate the expenditure side. Since the public debt assist the government to achieve its macroeconomic goals like economic growth, price stability and feasible BOP. But the main applications of these debts are lethargic economic growth, macroeconomic insecurity, declining development, investment curtailing, inflation, huge unemployment, deteriorating social conditions and increasing poverty, as a result the economy of the country may destabilized and creates the ways of corruption, violence and terrorism in the country. And as the case of Pakistan the major reason of sluggish economic growth is of domestic and external debt. And in order to improve the Pakistan’s economy, the government should make appropriate policy and make sure to implement that in order to control the debt, poverty, inflation, prosperity and employment level.

Apart from reporting the conventional debt ratios Mahmood (2009) provides two theoretical frames which are used to obtain and evaluate the necessary and sufficient conditions for public and external debt which may be favorable to maintain the good economy of Pakistan. The major verdicts are the primary fiscal and the current imbalances of payments were the major reasons of public debt sustainability issue.

Both the public and foreign debt ratios have remained far from the sustainable levels during 1970s to 2000s. The Results based on debt level maintaining situations indicate that although the favorable level of debt maintains, but the required condition for debt level maintaining is not met throughout the period except for a brief period of first half of 2000’s. This improvement in debt level maintaining pointers could not be maintained in the succeeding period of years and have deteriorated recently which is a source of concern.

On the other hand in Saleem’s (2001) vision the Pakistan has made a brilliant improvement in economy since its birth in 1947, keeping in view that there was massive hurdles that was facing at that era. The development of Pakistan’s economy has not up to the level of its potential. As compare to the developing countries in Asia, South America and Africa the development of Pakistan, there is fickleness in the Pakistan’s politicians and leaders as a result disorganization of the economy frame occurred, the national resources including both national wealth and funds are misused, which creates shocks to the economy: i.e., highly fluctuating rates in the oil prices during the 70’s and when there was international recession during the late 80s, the Pakistan economy is totally misbalanced. The country is, therefore, now facing abundant economic, social and political problems




To define the debt management objectives is a chief element of the debt management outline that is (a) it assists to formulate the debt management program in that way, to achieve and maintain debt management goals while avoiding differencing objectives., (b) it facilitates the measurement of performance of the debt management functions; (c) it matches debt management policies with other policies, mainly the monetary policy.

The fundamental objective is to wrap the government debts needs. The other objective may be to increase the finances need by government at the least long-term cost, while at the same time observing fluctuating in the cost at reasonable level. Any way, in economics the conversion cost minimization may lead to extreme borrowing from state bank or from ‘captive markets’ at under market interest rates (delaying the development of secondary markets).

Most economies in transition cost minimization usually results in excessive borrowing by the government from the central bank. Such borrowing is done on interest rates that are below market interest rates. The goal may be in such a case to provide support to monetary policies of the government. Monetary management can be consolidated by coordinating the monetary policies and the debt management activities. Another goal may be to improve the functions of the financial markets such as the treasury bills and bond markets, this can be achieved by combining various segments of the market and interest liberalization. Public debt management may also include as its goal the development of domestic capital market. Another important goal of debt management is to keep market functions smooth and to stop market disruptions; it may help in providing the government with a continous source of funding. A debt manager is also responsible for encouraging external investors and internal savers to provide funds for various developmental projects. Broadening the debt distribution and diversifying the borrowing capacity is one of the most important responsibilities of a debt manager. In order to achieve this goal the debt manager may use the private sector to increase the funding sources.

Monetary policies and market development considerations are very important for countries that are under or less developed and have suffered form the scars of high inflation. Similarly Pakistan has also focused on minimizing the borrowing cost, encouragement of savings, diversification of borrowing and broadening the debt distribution as its primary debt management objective.


After a brief introduction of the debt management objectives lets us see. what is public debt situation in Pakistan and what are the causes behind the external and public debt burden growth.

The problems of extraordinarily high public debt and very large external debt are the consequence of (a) large and persistent fiscal and current account balance of payments deficits, (b) imprudent use of borrowed resources, such as wasteful government spending, resort to borrowing for non-development expenditures, undertaking of low economic priority development projects, and poor implementation of foreign aided projects, (c) weakening debt carrying capacity in terms of stagnation or decline in real government revenues and exports, and (d) rising real cost of government borrowing both domestic and foreign. The dynamics of debt growth have been changing. In the last few years, stagnation in government revenues and exports and rising cost of both domestic and external debt have gained importance as the driving forces behind the rise in external and public debt burden growth.


The following table shows a comparison of Pakistan’s public debt with other countries as a percent of GDP and revenue and also in the same manner the comparison of internal debt as a percentage of GDP and revenue.

Public Debt Burden: International Comparisons

Source: IMF International Financial Statistics,

In the following table a comparison between pakistans external debt burden with other countries is shown. The comparisons are presented as net present value of external debt.

External Debt Burden: International Comparisons

Source: World Bank: Global Development Finance,

As shown in the above mentioned table the net present value of Pakistan’s external debt is clearly much higher than South Asian and most East Asian countries. If we take into account Pakistan’s foreign exchange obligations to residents and institutional holders of foreign currency accounts, Pakistan’s external debt burden appears to be as high as Nigeria’s and Indonesia’s and only below that of Brazil’s.


Debt management is the cycle under which the government obtains and uses the debt successfully and proficiently for the funds purposes by keeping in view the debt management objectives. It includes both the technical and organizational features of managing the public debt. The technical feature focal point is on the requirement for the funding and to make certain that the term and conditions of those debts are proportionate with the future money borrowing service ability of the country.

The organizational features pact with the legislative, accounting and scrutinizing of new debts and as well as the total current debt.

Following are the main roles of debt management which are essential for the public debt management and I suggest that if there is perfect application of these roles in Pakistan, the Pakistan may able to resolve the debt management issues.


In order to control the debt, we must know the debt, for instant, information on foreign debt and the debt services payment which is very much important for the daily organizing the foreign exchange transactions and as well as the organizing the debt and for the future arrangement strategies of the foreign debt. In detailed, such information assists the higher executives to make decision for the making payments to creditors on smoothly basis. And in collective levels, debt data are required for examining the current foreign exchange requirements, expecting future debt services liabilities, examining the result of future funding, and the management of external risk.

Accounting supports the firm grounds reality for best knowing, in details, the degree of debt and the payment of debt services. Key obligation to release this function is computerized aid system for recording and reporting debt and for activating debt service payments.


The government’s debt requirements are a role of the flows of its income and expenditure over the period. Such flows should be projected on fortnightly and monthly basis; as a result the cost-effective arrangements can be put in place for the funding of cash shortfall and for the investment of provisional surpluses. Projections depend on accounting system but must associated with the analytical work out on specified issues, studying and surveys to the governmental agencies and so on.. in the latter case, the quality of information received is clearly effected by the skill of the executives to employ in a productive conversation with the suppliers of the data

Manipulating debt service payments when a huge share of debt stock has been released in the form of short term debts, or at floating rates of interest, further difficulty in projecting. Thus, government debt authority must have satisfactory ability to examine and forecast trends in all over the world and the local economy and in the financial markets.


Every country has the objective of local debt management which must be reflected into their operating policies and debt programs. Debt requirement will determine the program size, and the volume to be raised will affect the policy model. If there is large requirement of financing, the governmental authority must calculate all the domestic available funds in the shape of saving at the same time. And on the other hand, if the requirement level is small size, the governmental authority can obtain the debt by keeping the longer view. However the funds availability and market economic conditions play an important role for making the choices of the sectors and types of debt. As a result, the investing activities of each sectors of the economy, the market for the instrument’s type might magnetize them for making the significant policy formulation.


The function of the debt management is to cope with the threats that are raised by exchange rate and interest rate fluctuating. Occasionally developing countries are facing serious problems with the balance of payments due to arising of negative changes in the market prices of imports and exports. For example, country is exporting in euro and its foreign debts are repayable in Canadian dollar. Declining in the exchange rate of the euro as compare with the Canadian dollar will increase the debt service liability of the debt country.

3.4.5 Primary Issuance Function

Broadly view, this function should be restricted to the judgment and the activities of the government debt authority foremost up to the time that a loan or bond issue is ready for issuance. In developing countries, the role of selling the issue into the market is carrying out not by the treasury but by the state bank like in Pakistan, and the goals may be as much those funds management as of the government debt management. However in developed countries, the treasury is responsible for issue in the market and this function vary, i.e., it wraps the whole relationship between the borrower of state and government primary paper market. Features of the primary issuance roles vary from economy of different parts of the countries because of administrative structures and national traditions but more important because of differences in government goals and policies, with view to the markets that the government wants to value, the diversity of instruments employed, selling method (such as public sale), and so on.


The secondary market role is usually executed other then government executives which can be most essential for the achievement of its activities, especially if the government funding are more and anticipated the same and if the financial instruments are fully controlled by the businessmen. And to ensure these professionals these secondary markets will set prices on daily basis. As a result these investors may invest more and more. However these secondary markets cannot increase the investment by itself and as in the practical cases in different part of the world exhibits that the increase in investment needs both the dynamic involvement from the government and the decreasing of diverse regulatory obstacles. i.e. an organized structure of interest rates through which the successful yields on instruments are kept below the level of market of credit, kept by the commercial banks of their right position as taker to the private sectors; lawful obstacle on the issue of financial instruments by the companies, large lowest size of new instruments, which attract the single businessmen, and the shortage of financial instrument dealing institutions in the form of competitive public selling system, rating institutions and the discharging and resolution systems.

The function of the executives have two sides., on the department way, to decrease the lawful and controlling difficulty and to generator an aiding model for the secondary market and on the activity way, to implement issuing polices and methods that will assists in the trading of the financial instruments.


In underdeveloped secondary markets, discharging and resolution that is the transfer of ownership of financial instruments and their receipts are commonly done by the financial institutes or by the state bank of the country in case of dealings of the governmental financial instruments which are kept by different financial institutes. Any way, this arrangement may not increase the government income and in order to solve this, more markets should be developed. More over a central depositary centre, may be consider in this regard. Some countries of the world, the state bank accepted to enhance its function as mediator for the government officials for performing a computer related financial instruments and making there payments for the secondary markets. In most of other countries govt works in participation with other banks and dealers making a separate and effective securities depository centres. It helps in making investors safe aginst the failures to fulfill obligations. Such centres are legally entitled to step into the affairs and help parties that may fail to fullfil their obligations. In such cases the governments fulfils its responsibilities to make the economy fully functional and stable by bailing out unstable, faltering or failing economic units.


It is very important that the governments debt manager provides accurate information about the debt to the market in time. Similarly the debt manager shall have relevant information about the market inorder to achieve the goals specified in the policy. In most countries the debt manager is assisted by an electronic information system that provides easy access to relevant information about the market such electronic databases are provided with information by various organs like the government, banks and other economic entities functional in the market. Hence making it easy for traders, issuers and investors to carryout deals online and in less time. Such technologies like the fiber optic cables and other tools that provide access to online databases containing important and re;event informations to various stakeholders including the debt manager are becoming the major necessaty of major economies and aspiring developing economies which are eying long term economic goals.


A government in any economy serves as a market participant and therefore shall play and important role in market surveillance. In order to carry out their functions governments all over the world follow different models. For example, some countries do their market surveillance using specific agencies which are responsible for reporting to the parliament about the market situation and economy through the ministry of finance. While others have bestowed such tasks upon the central bank, stock exchange or other self regulatory organizations. The supervisory function of the government is not that simple or easy it requires vision and vigilance staff resources in adequate amounts and quality of work.


The only reason for borrowing money by the government is to finance the budget and reduce the fiscal deficit. In Pakistan ministry of finance is responsible for formulating budget and borrowing money. Such authority is rested in it by the parliament and the ministry is answerable to the parliament. The budget is usually presented to the assembly by minister of finance and is open to criticism and objections. The budget is followed in full spirit when the parliament gives it its approval. Therefore, the ministry of finance is also responsible for managing the public debt, but it has the authority to call other bodies like central bank to carry out the task.

Three possible institutional arrangements for the general conduct of debt management are:


It is responsible for formulating policies describing short term and long term goals regarding the public debt. The treasury directorate is responsible for the management of financial resources and public debt and carrying out functions regarding fiscal and debt management. In such institutional arrangements the central bank is only left with intricate measures related debt management like selling, banking and settlement arrangements.


Central banks usually serve as an auxiliary body when it comes to debt management. For example it is concerned with providing advice to the government for formulating policies regarding debt management. It is also responsible for the short term management of government’s debts and being a body with much realistic data it any serve as in charge of strategic policies regarding the government’s debt. The SBP Act of 1956 under sub section 13 (e) of section 17 makes central bank responsible for the management of public debt for which purpose it has established a a debt office. Such arrangement gives wider space of operations to the debt management office to carry out its business as it separates the functions of monetary, fiscal and debt management into smaller segments so that the responsibilities shall be carried out in less time and with accurate measures. Except for Sweden where a debt management office was formed back in 1780s to borrow on the behalf of the kingdom of Sweden and manage the state debt, in other countries such offices were formed in the 1980s. Before that parliament was responsible for borrowing and managing the debts now such agencies work in many countries under the ministry of finance. In some countries different problems arising during the management of public debt may be dealt by various departments working under the frame work of the ministry of finance.

Chapter 4

Analysis of Data

4.1 Introduction

The data used in this study is mostly taken from secondary sources like state bank of Pakistan, federal board of revenue. In order to analyze the data a number of statistical methods like analysis of variance (ANOVA), F-test and T-test are used. The results of the above mentioned tests and the model summary are given in table 4.1, 4.2 and 4.3 respectively.

Table 4.1 Model Summary



R Square

Adjusted R Square

Std. Error of the Estimate

Change Statistics

R Square Change

F Change



Sig. F Change











a. Predictors: (Constant), Public Debts , Fiscal Deficit (as percent of GDP)

Table 4.2 ANOVAb


Sum of Squares


Mean Square

















a. Predictors: (Constant), Public Debts , Fiscal Deficit (as percent of GDP)

b. Dependent Variable: Economic Growth (GDP growth)

Table 4.3 Coefficientsa


Unstandardized Coefficients

Standardized Coefficients




Std. Error








Fiscal Deficit (as percent of GDP)






Public Debts






a. Dependent Variable: Economic Growth (GDP growth)


The tables shows the results of the regression analysis. From the above tables the relationship are as follows:

Economic growth = 5.322- 1.414 Fiscal Deficit + .001 Public debt

The effect of the Fiscal Deficit is negative on the economic growth of Pakistan and positive from Public Debt it is concluded from the above calculated that, if any change in the independent variables occurs it will affect the Economic growth. From the analysis it is obious that, Fiscal deficit and public Debt are independent variables Fiscal deficit had negative relationship and public debt had positive relationship with economic growth. In contrast if public debt increases or decreases, it will cause Economic growth to increase or decrease respectively. While the other independent variable, Fiscal deficit, has negative relationship with economic growth. Increase or decrease in this variable will effect Economic Growth to decrease or increase, respectively. A 1% change in Public debt will lead 0.001 % positive change in Economic Growth, 1 % change in Fiscal deficit will lead to -1.414 % negative change in economic growth.


By conducting the significance tests on the variables (independent), it enable us to find out that the variables are significant or insignificant in the analysis. First we will avaluate the degree of freedom, which can be as follows:

Degree of freedom = Total no. of observations – Total no. of variables


Degree of freedom = 8-2 = 6

It can be seen that involves the confidence interval value. By Using the values of degree of freedom and confidence interval, we can have the value of t table. from the t-distribution table. These are hypotheses are used, H1 and Ho. Hypothesis H1states that the coefficient in question is not equal to zero, that is where as Ho states that. The analysis gives us the t value, that is, t-calc. Both the t-calc and t-tab are compared; this is then used to evaluate if the independent variable is significant or insignificant. The value of t-calc is compared with the value of t-tab. If t calculated > t tabulated then we can say that() Beta is not equal to zero, and accept hypothesis 1.

If t calc. > t tab. then the coefficient of these variables are significant.

if t calc. < t tab. then coefficient of these variables are insignificant

At 5% confidence interval and df = 6, the tabulated of t, t tab. = 2.02809

So with a 5% confidence interval the calculated value of t are;


t calc.


Fiscal Deficit

Public Debt




From the results it can be analyzed that the calculated value of t is less than the tabulated value of t for all the independent variables. So according to the t statistics, the coefficients of these variables are insignificant.

F -Test

F-test is used to find out whether overall model is significant or not. There are hypothesis used, H1 and Ho. H1 states that the R2 is not equal to zero, that is () R square is not equal to and Ho states that. The value of F-calc is examined with the value of F-tab. and suggests which hypothesis to accept and which to reject. If f-calc > F-tab then we can say that and accept

If F-calc > F-tab, then the overall model is significant.

If F-calc < F-tab, then the overall model is insignificant.

We have and v = 6 and k =2. So T-tab. = 6.3882. And the calculated value of F is F-calc. = .074. The calculated value of F is less than the tabulated value of F so it is concluded that the overall model is insignificant.

R2 is the coefficient of determination; it is the proportion of the total variation in the dependent variable. The value for is R-Square is 0.581 (58.1 %), which tells that the model is good in explaining all independent variables. We can also say thatS, variation in inflation is explained up to 58.1 percent by variation in the independent variables.



5.1 Conclusion

A sound fiscal policy is essential for preventing macroeconomic imbalances and realizing full growth potential. Pakistan has made considerable progress in fiscal consolidation over the last six years.

The analysis about the fiscal deficit has been proved that there is negative relation between the fiscal deficit and economic growth. This is because of high public debt burden and now we are able to state that proper debt management highly depends on the country sound fiscal policy and which further result in Economic Growth. Pakistan fiscal deficit in 2005-06 was 3.4 percent of GDP in 2005-06 as against the target of 3.8 percent of GDP, due to better revenue policy. The earthquake in 2005 not only hit the core of heart of Pakistani nation it also had negative impacts on the economy. The expenditures in this regard negatively impacted the GDP by 0.8 percent thereby increasing the fiscal deficit by 4.2 percent of GDP. It resulted in the fall of public debt from 100 percent of GDP to 54.7 percent of GDP.due to rise in prices of commodities like oil, food and due to the incumbent global financial crisis the balance of payment came under severe pressure in the year 2007-08. Pakistans foreign exchange reserves reached a dangerously low level at the end of October 2008. Such economic crisi increased internal and external suspicions about the balance of payment of the country. Pakistan approached the IMF for balance-of-payments support and received a $7.6 billion package spreading over seven quarters, ending in June 2010.

The budget deficit was targeted to decline from 7.4 percent of GDP in 2007-08 to 4.3 percent in 2008-09, and the current account deficit was targeted at 5.9 percent of GDP-down from 8.4 percent in 2007-08. Fiscal deficit is expected to be 4.3 percent of GDP-down from 7.4 percent and the current account deficit is likely to be 5.3 percent of GDP-down from 8.4 percent last year. There are indications that the government is targeting a fiscal deficit of 4.6 percent of GDP in the Budget 2009-10 as opposed to 3.4 percent agreed earlier with the IMF. Going forward, Pakistan will have to allocate substantially large resources for strengthening the country’s physical and human infrastructure to sustain the growth momentum.

From the analysis it can be seen that, Fiscal deficit and public Debt are independent variables Fiscal deficit has negative relationship and public debt has positive relationship with economic growth. In other words if public debt increases (or decreases), it will cause Economic growth to increase (or decrease) respectively. While the other independent variable, Fiscal deficit, has negative relationship with economic growth. Increase or (decrease) in this variable will cause Economic growth to decrease or increase.

5.2 Recommendations

Most under developed and less developed countries do not utilize their borrowed money in a wise manner. Such a policy discourages the investors and therefore marrs the developmental projects. In order to avoid such situations govt would usually raise taxes which may lead to inflation, unemployment, low investments and ultimately depression. In order to get a sustainable output of the foreign borrowed funds the govt shall use it on developmental projects..

So Public debt is such a factor that should be taken into account by the management.

Remittances can help in this regard as well. As it is known that with higher remittances the Balance of Payment can be converted into surplus.

Governments should suggest various investment opportunities for the national living abroad so that they can invest their saving into developmental activities of the economy.

The debt management is the process by which the government acquires and utilizes the debt efficiently and effectively for budgetary purposes keeping in mind the debt management objectives.

The functions of debt management are concerned which are discussed in the early chapter there is a need for the proper implementation of these functions. Following are the functions which are recommended for proper implementation.

Accounting function: A proper accounting function for the purpose of debt management is needed because accounting provides the firm basis for the best knowing, in detail, the extent of debt and the payment of debt service (interest and redemption).

Forecasting Function: Since government borrowing requirements are a function of its revenue and expenditure over time. Forecasts shall be made on weekly and monthly basis so that cost effective arrangements should be made for the financing of cash deficit and investment of temporary surpluses.

Policy and Planning Function: Mismanagement of economic goals arises mainly due to the absence of planning. So proper planning is necessary for the govt to manage the economy and thereby the public burden in proper manner.

Risk Management Function: Risks usually arise from exchange rates and interest rates and swings in it. Therefore every economy shall have a risk management plan in order to cope with situations that may aggravate the economic situations.

Clearing and Settlement Function: Sound clearing and settlement function by the banks will be another addition for the management of public debt.

The Information Function: The govt debt manager shall transfer the information to the market always in timely fashion. Information management shall be done in such a manner so that the information leads to the market briskly avoiding risks that may be caused by uncertainties.

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