Essay on Budget Deficit, Fiscal Stimuli and the Economic Recovery

Essay on Budget Deficit, Fiscal Stimuli and the Economic Recovery

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Budget deficit, fiscal stimuli and the economic recovery

Post budget debate is heating around the points if the economy is heading in the right direction and government has the capacity to deal with major economic challenges. It is true that the economy of Pakistan is passing through a critical stage and major road blockers to growth seem to be increasing unemployment rate, inflation rate, incidents of terrorism as a consequence falling foreign and local investment levels, and power shortage. Adding to the injury, the country is included in the list of top 5 most unstable countries, along with Iraq and Afghanistan, of the world.

Pakistan economy, undoubtedly, is caught in both the cost push and the demand pull inflation but it can be rescued if the government uses right policy mix. However, with over 80% of the available pool of money reserved for non-development expenditures (defence, interest payments, running of the federal government), Pakistani government seems to be running out of options to introduce any stimuli package in the FY 10/11. Contrary to that, the USA, the UK, Japan, China and India, were able to recover their economies through fiscal stimulus packages, however, Pakistani government decided to cut down spending on development projects which will likely slow down the economy further.

The fiscal stimulus package is normally designed for improving the infrastructure of the economy which in turn helps creates jobs, improves both income levels and standards of living. The construction industry which is normally the biggest beneficiary of such stimulus package grows with a multiplier effect creating thousands of jobs and stimulating demand of over 40 allied industries . In Pakistan’s case, the multiplier e...


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... tightened the hands of the government. Our dependency on the IMF and the World Bank is continuously increasing because Pakistan’s external account balance is under tremendous pressure. And to finance it, government has to seek help from the IMF-money, however, doesn’t come free but with conditions attached to it. To release our external accounts from any pressure, Pakistan has to make sure constant but increasing inflow of dollars to help build its foreign exchange reserves. That’s the only way available to come out of the ugly stick of the IMF. And to meet that goal, Pakistan must focus on increasing exports and home remittances-the two vital sources to earn foreign exchange. Foreign investment is and could be another important source to build foreign exchange reserves but it will unlikely improve until the current security situation in the country improves.



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