This document discusses deficit financing in Pakistan. It begins with introducing the concept of deficit financing and its importance and risks. It then provides background on Pakistan's budget and current account deficits, showing deficit rates from 5.4-8.7% of GDP in recent decades. Sources of deficit financing in Pakistan include printing currency, borrowing, foreign loans/aid, and bank borrowing. Causes include rising expenditures, weak fiscal policy, and low tax revenues. Adverse effects are inflation, higher interest rates, and reduced private investment. The document concludes with recommendations such as improving tax collection, reducing non-essential spending, and attracting foreign investment.

1. DEFICIT FINANCING
CASE OF PAKISTAN
By Sadaf Nawaz
Financing for development

2. CONTENTS
 Introduction
 Background of the problem
 Situation of Deficit in Pakistan
 Sources of deficit financing in Pakistan
 Causes of deficit financing in Pakistan
 Adverse effects of deficit financing on economy of
Pakistan
 Conclusion
 Recommendations

3. INTRODUCTION
 The method used by a Government to finance its budget
deficit, that is, to cover the difference between its tax
receipts and its expenditures is called deficit financing.
 Deficit financing is an important source of capital
formation in the developed and underdeveloped
countries of the world. But it can be a cause of
economic problems in long term.
 In developing countries, the governments are faced with
persistent deficits in the budgets. They are liberally
using the delicate tool of deficit financing for paying back
the domestic and foreign loans, meeting the government
consumption expenditure etc., same is the case of
Pakistan.

4. BACKGROUND OF THE PROBLEM
 In Pakistan the ratio of the budget deficit is different in
different years. From last two decades the budget deficit
is 5.4% to 8.7% of GDP. The average deficit rate was
6% in the period of 1970 and it was 7.6% in the period
of 1980. The Pakistan tax system is still narrow and
punctured due to the poor and weak tax administration.
 The balance of payments deficit has become a
permanent problem of Pakistan's economy. For the last
fifty years Pakistan has been facing continuously from a
current account deficit. The international loans are used
to finance the deficit. The debt service charged more
than 5% of the GDP of the country.

5. SITUATION OF DEFICIT IN PAKISTAN
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Cash surplus/deficit (% of GDP)
Cash surplus/deficit
(% of GDP)

6. SITUATION OF EXTERNAL DEBT SERVICING IN PAKISTAN
0
1E+09
2E+09
3E+09
4E+09
5E+09
6E+09
7E+09
8E+09
9E+09
Debt service on external debt, total (TDS,
current US$)
Debt service on external debt, total (TDS, current…

7. SOURCES OF DEFICIT FINANCING IN PAKISTAN
Following are the sources of deficit financing in
Pakistan
 Printing new currency notes
 Public borrowings
 Foreign loans, aid and grants
 Using previous balances
 Borrowings from banks including from the central
bank

8. CAUSES OF DEFICIT FINANCING IN PAKISTAN
The main reasons of deficit financing in Pakistan are
as under:
 Rise in government expenditures
 No rule based fiscal policy
 Fiscal deficit
 Low savings
 Rapid population growth
 Low tax revenue collection

9. ADVERSE EFFECTS OF DEFICIT FINANCING
 In case the deficit financing is financed by printing
of notes by the central bank, It creates inflationary
impact on the economy, which (a) discourages
foreign investment (b) reduces exports (c)
increases imports (d) increases inequality in the
distribution of income (e) lowers saving rate in the
economy and (f) encourages wasteful expenditures.
 When the government borrows funds, It competes
with the private business borrowers for funds. The
additional demand for funds raises interest rate in
the money market. As a result, thereof, the private
investment is depressed.

11. TAX REVENUE AS PERCENTAGE OF GDP IN
PAKISTAN
0
2
4
6
8
10
12
20002001200220032004200520062007200820092010201120122013
Tax revenue (% of GDP)
Tax revenue (% of
GDP)

12. CONCLUSION
 In Pakistan deficit financing is a way to create
further deficit. As government take more loans to
fulfill budget deficit the debt also increases resulting
further deficit in coming years.
 Pakistan tax system is also weak. Pakistan is
collecting its revenue more in form of indirect taxes
as compared to direct taxes.

13. RECOMMENDATIONS :-
Pakistan need to take serious steps to coupe this
situation.
 Pakistan should frame its import and export policy
in such a way that the supply of essential
commodities does not fall and they are provided at
reasonable prices in the country.
 Government should increases the rates of taxes on
luxury goods, reduces its own non essential
expenditure, introduces compulsory saving
schemes etc.
 Improvement in tax system and they should focus
on direct taxes in order to increase tax revenue.

14. CONTI…
 Government should focus on Human capital.
 Strong coordination between fiscal and monitory
wing of government is also necessary to reduce the
deficit problem.
 Merit base selection in public institutions can
increase the efficiency of institution instead of blind
privatization.
 People should be encouraged to invest. When they
earn more, they will contribute in tax revenues.
 Strong foreign policy to attract foreign investment.

15. THANK YOU