Impact Of Financial Policy On Economic Development Of Pakistan

Introduction

Economics growth measured increasing production of goods and services from the previous period of time. It is measured in nominal as well as real rate. Evidence-based on the impact of fiscal policy on development is unconnected. A positive indication of literature indicates a positive society between financial policy and economic development, while other studies get negative connections. It is unlikely to have non-linear relations between the financial policy and the economic development of the mixed results. As a result, there may be a limit for the financial policy limit, which is estimated at which extent the financial expansion can work as a financial development policy. Iqbal (1995, 1994, & 1998) have examined that fiscal policy is an important variable that affects the economic growth in Pakistan. 

We have also examined that fiscal policy is the main variable that has a significant impact on Pakistan’s economic growth. In this study, the author discussed that different problems of the economy can be solved by implementing fiscal policy. Khilji and Mahmood (1997) discussed fiscal deficit and concluded that fiscal deficit is the main variable that has a significant impact on economic growth in Pakistan and largely contributes to solving problems of the economy that decline the growth level of Pakistan. The authors also concluded that fiscal policy helps in improving the economic situations of the economy. Haq (2003) concluded that fiscal policy has an insignificant impact on the macroeconomic variables such as investment level, inflation rate, and economic growth of Pakistan economy. The author argued that fiscal policy has an insignificant impact on Pakistan’s growth level however fiscal policy affects the growth level through demand and supply mechanism.

He discussed fiscal deficit in different ways and through different channels concluded the significant as well as insignificant effect on the economic growth of Pakistan. Buiter (1976) has discussed the crowding-out effect and concluded that fiscal policy is less effective on the economic growth of Pakistan because of the crowding-out effect. Both policymakers and the public are not agreed on the effective role of government in an economy.

Pakistan’s economy has two notable features. First, it has undergone multiple ups and downs in economic performance amid a historical average growth rate of over 5%, with high-growth cycles inevitably accompanied by rapid slowdowns. The average fiscal deficit was 3.5 percent during 2002–07, with an average GDP growth rate of over 5 percent. However, the average fiscal debt was 6.3 percent during 2008–15, with an average GDP growth rate of 3.3 percent. 

The overall budget deficit declined substantially from 8.2 percent of GDP in FY2013 to 4.6 percent of GDP in FY2016, primarily due to better expenditure management during the recent recovery period. The country’s history of growth seems to indicate that the economy continues to perform well in periods of modest fiscal deficit, while economic growth has been connected with higher fiscal deficits.

Fiscal policy refers to a great step of the central government to improve the economic situation. By implementing fiscal policy central government overcomes different problems that cause the decline of the growth of the country. In fiscal policy, the government implement high taxes and control the inflation level problems. In Pakistan, there is a high rate of inflation level in the last few decades and the inflation level is still goes on the increase. In current statistics, the inflation level increases by 9.4% in 2019 wherein in 2018 it is 5.4% inflation is such a problem that it needed to be controlled because it declines the growth level. An effective fiscal policy is needed to overcome the inflation level.

For the last few decades, a debate is continuous whether the government’s role effective in increasing economic growth or not. According to Adam Smith government creates disequilibrium in an economy and the economy is at full employment level and can increase the growth rate without government intervention but Keynes rejects this concept by explaining that there should be an effective role of government which contributes its virtual role to increase in growth level of the country. According to these debates, an effective policy of the government should be implemented in order to control the major problem of economics like the inflation rate. As fiscal policy more effective than inflation level decline and economic growth increase.

Fiscal policy means that a government changes its level of expenditure and tax rate to track and control the economy of a country. The fiscal policy takes as an effective independent variable. Fiscal policy has a significant impact on Pakistan’s growth level.  If a country’s fiscal policy improves the real growth of a country rises. If the center of a country wants to increase the growth rate of its economy it will focus on implementing fiscal policy bitterly. Fiscal policy data obtain from the international monetary fund (IMF).

Population growth takes as the independent variable. The population has a negative impact on GDP. In the case of Pakistan population level in continuous increases for the last few decades and still not focus to control the population level. In the world population, Pakistan has the largest contribution and has remarkable at no 6 in the list of the population of the world. Population growth data obtained from the world development indicator (WDI).

Government expenditure takes as the independent variable. Government expenditure has a positive impact on the real growth rate of Pakistan as well as a negative impact on the real growth rate of Pakistan.  Government expenditure has two types of developmental expenditure and non-developmental expenditure. By spending more on developmental expenditure revenue of government increases as a result growth level of the country also increases but on the other hand spending on non-developmental expenditure. The growth level of the country does not increase significantly. Government expenditure data obtained from the world development indicator (WDI).

Other factors in fiscal policy including human capital, government expenditure, fiscal deficit, etc. Fiscal policy plays a very important role in economic growth be complete and controlled fiscal policy is very necessary for the development of a country but unfortunately in developing countries like Pakistan fiscal policies are week and not completed successfully which causes low tax returns, fiscal deficit, and increase in foreign debt. This study analyzed the consequences of fiscal policy in economic development considering the problem of fiscal policy politically, economically, and socially. The main problem is the revenue generation of the country and this study focuses on that factor that causes the problem solve this study presents the econometric model in which I will explain the effects of fiscal policy as well as the solution to the problem in Pakistan.

Objectives

• To inspect the effect of fiscal policy on economic expansion. 

• To observe the effects of other variables like Remittances, education along fiscal policy on economic growth.

• To analyze the problem regarding fiscal policy measures and suggest the proper measure to implement a better fiscal policy in Pakistan.

Conclusion

This study discusses the impact of fiscal policy on the economic development of Pakistan. Many previous pieces of research also explain this financial policy’s effect on economic development. In this study economic growth use as a dependent variable while other variables like government expenditure, education expenditure, school enrollment, remittances taken as independent variables. Pakistan Government spends a huge amount of budget on non-developmental expenditures which generate no direct revenues for the Government so, Economic growth is not significantly increased because of less spending on developmental expenditures. Pakistan also suffers from terrorism in the previous years so, there is a need to spend a huge amount on the defense sector for the betterment of the situation of the country. Because of all these reasons, government expenditures have not so much contributed to enhancing the growth of the country so, expenditures have a negative impact on economic development.