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Crowding Out Effect of Public Borrowing: A Case of Pakistan


  • Khan, Rana Ejaz Ali
  • Gill, Abid Rashid


To 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.

Suggested Citation

  • Khan, Rana Ejaz Ali & Gill, Abid Rashid, 2009. "Crowding Out Effect of Public Borrowing: A Case of Pakistan," MPRA Paper 16292, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:16292

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    References listed on IDEAS

    1. 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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    Cited by:

    1. Hüseyin Şen & Ayşe Kaya, 2014. "Crowding-Out or Crowding-In? Analyzing the Effects of Government Spending on Private Investment in Turkey," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(6), pages 617-630, December.
    2. repec:eco:journ3:2018-01-19 is not listed on IDEAS
    3. Mobeen Ur Rehman, 2013. "The Role of the Pakistani Government in the Efficient Management of Public Funds," Public Finance Quarterly, State Audit Office of Hungary, vol. 58(2), pages 230-237.

    More about this item


    Public Borrowing; Private Investment; Interest Rate; Subsidies; Transfer Payments;

    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 - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; 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

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