Crowding Out Effect of Public Borrowing: A Case of Pakistan
AbstractTo meet the public deficit, Government of Pakistan has been disproportionately borrowing from the scheduled banks and general public which are also the source of funding for private investment. Even the public sector corporations are doing the same. From the crowding out perspective borrowing and public expenditure are the same, as borrowing is mainly undertaken for financing expenditures. The issue of crowding out or crowding in effect of public borrowing on private investment needs considerable attention. The current study has investigated the crowding-out effect of public borrowing on private investment in the country. An investment function of three independent variables, i.e. public borrowing, GDP and lending rate has been estimated through unit root test, co-integration test and vector error correction model. The time series data of 34 years, i.e. fiscal year of 1971-72 to 2005-06, taken from Federal Bureau of Statistics and Finance Division, Government of Pakistan has been used. The results do not corroborate the crowding-out hypothesis in Pakistan explaining the market imperfections and substantial amount of excess liquidity. The results provide the evidence of crowding-in effect, which explains the direction of public expenditures towards private sector through contractors, politicians and bureaucrats, instead of public projects. The provision of subsidy, transfer payments, and substantial amount of micro-credit also explain the phenomenon of crowding-in. The evidence has important implications for fiscal management. To avoid unnecessary inflation and external indebtedness associated with deficit financing, government should rely on domestic sources. As long as excess liquidity prevails in financial system, the domestic resources, other than State Bank of Pakistan may be used to meet the deficit without hurting private investment.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16292.
Date of creation: Jan 2009
Date of revision:
Public Borrowing; Private Investment; Interest Rate; Subsidies; Transfer Payments;
Find related papers by JEL classification:
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-11 (All new papers)
- NEP-CWA-2009-09-11 (Central & Western Asia)
- NEP-MAC-2009-09-11 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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