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Why Is It So Hard to Finance Budget Deficits? Problems of a Developing Country

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  • Mr. Shigeru Iwata
  • Mr. Andrew Feltenstein

Abstract

This paper examines possible ways for a developing country to finance budget deficits from domestic resources. It does so by analyzing Pakistan's National Savings Scheme (NSS). The NSS has a number of unusual attributes, and its impact upon the economy of Pakistan is not clear, but given Pakistan's chronic fiscal difficulties, the NSS is of great importance in financing the public sector deficit. We use an econometric model to analyze the relationship between the demands for NSS deposits and various other financial instruments, in particular, bank deposits, and foreign-currency deposits. We conclude that NSS and bank deposits are net substitutes, as are NSS and foreign-currency deposits. Bank deposits and foreign-currency deposits, however, seem to be neither substitutes nor complements. Also, the estimated income elasticity of the demand for bank deposits is negative, while that of foreign-currency deposits is positive, and that of NSS is not significantly different from zero. Finally, there is evidence that foreign-currency deposits are a net substitute for NSS deposits. Thus, there is some empirical evidence that foreign currency deposits have absorbed part of the demand for NSS deposits. Accordingly, the availability of foreign-currency deposits may have reduced the ability of the government to finance itself.

Suggested Citation

  • Mr. Shigeru Iwata & Mr. Andrew Feltenstein, 2002. "Why Is It So Hard to Finance Budget Deficits? Problems of a Developing Country," IMF Working Papers 2002/095, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/095
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    Cited by:

    1. Sajid Amin Javed, 2019. "Limitless Deficit Financing for Economic Prosperity: Where They Got Keynes’s Deficit Spending Wrong? تمويل العجز بلا حدود من أجل الرخاء الاقتصادي: كيف أخطأوا فهم فكرة تمويل العجز لكينز؟," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 32(1), pages 97-109, January.
    2. Abdul Jalil & Hafsa Hina (ed.), 2024. "Monetary Policy: Crafting a Path for Pakistans Economic Stability," PIDE Books, Pakistan Institute of Development Economics, number 2024:03.
    3. Raghbendra Jha, 2004. "Macroeconomic stabilization and pro-poor budgetary policy in the globalized economy," CAMA Working Papers 2004-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Muhammad Aslam & Wajid Alim & Naeem Khan, 2022. "Nexus between Capital Flows and Economic Growth: An Evidence from South Asian Countries," Journal of Economic Impact, Science Impact Publishers, vol. 4(2), pages 14-21.
    5. Govinda Bahadur Thapa Ph. D., 2005. "Deficit Financing: Implications and Management," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 17, pages 16-26, April.
    6. Kashif Ali & Mahmood Khalid, 2019. "Sources to Finance Fiscal Deficit and Their Impact on Inflation: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(1), pages 27-43.
    7. Adams, Samuel & Klobodu, Edem Kwame Mensah, 2016. "Remittances, regime durability and economic growth in Sub-Saharan Africa (SSA)," Economic Analysis and Policy, Elsevier, vol. 50(C), pages 1-8.

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