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One major issue is to finance their domestic credit, it starts to speed up its
money supply over the demand which certainly resulted in foreign reserve
outflows
Government financed its budget deficit via public debt and bank
borrowing, it is term deficit financing. There are many reasons for
deficit financing in Pakistan such as an increase in government
expenditures in previous years, it has not been able to meet its
expenditures from its revenues. No sound fiscal policy which is
vital pre-requirement to attain macroeconomic stability. So, there is
an increased in public debt due to fiscal unruliness, and
government has to face fiscal deficit31. The people in Pakistan
have low savings because they are consumption oriented, but
government is forced to utilize deficit financing like an instrument
to cover up the difference between its receipts and expenditures
gap. Swift population growth is attached with low economic
growth in Pakistan. Deficit financing is a finest refreshment in
support of economy in short-range. On the other hand, deficit
financing is a bad evil for economy in long term. For in full view,
we discuss the main sources of financing and its effects on our
economy. Each methods has its own implications, which is
discussed in detail.(i)Bank Borrowing (ii) Public Debt, it is of two
type...external debt and domestic debt/non-bank borrowing. The
government covers its budget deficit by borrowing from the central
bank of country in two ways
.
(2) Government draw upon the cash balances of the past for meet
up budget deficit.
The effects of the both financing methods are that increase the
money supply in the country and this thing
creates the inflationary pressure in the economy.
ScenarioofPakistan
Pakistan has a history of macroeconomic imbalances and until
recently has extremely high foreign (as well as domestic) debt,
decreasing level of international reserves, depreciation of currency
day by day, high inflation, high nominal interest rates, continuous
budget and current account deficits with un-sustainable, low
growth.
Output:The average economic growth over 40 years is around 4
percent. The main focus of any policy has been to achieve a
sustainable growth pattern. However, due to a number of
macroeconomic imbalances such as high budget deficits, high
indebtedness, low savings and investment, lack of fiscal discipline,
undeveloped financial markets, unstable exchange rates along with
high population growth and huge defense expenditures made this
task almost impossible. Some of these macroeconomic imbalances
contributed to episodes of high inflation and unemployment. Gross
Domestic Product (GDP) growth has been stuck at a level, which is
half of the level of Pakistans long-term trend potential of about 6.5
percent per annum and is lower than what would be required for
sustained development.
Conclusion
The study was engaged to investigate the impacts of budget deficit
on macroeconomic variables such as output level, balance of trade
and inflation. Major conclusion drawn from this empirical
estimation practice is that the government budget deficit has
significant impact on inflation and balance of trade. The ways
through which budget deficit can be financed, are inflationary. We
have analyzed that the domestic borrowings of government helps
the money supply to increase same like the credit provided to
private sector gives boost to money supply. Reserves can also be
used to finance for the deficit, so gathering the foreign reserves is
accomplished with overall extra money supply. More alarming
situation is that the government enforces central bank to print new
currency for the sake of deficit fulfillment. This definitely tends to
create upward pressure on inflation.