RELATIONSHIP BETWEEN PAKISTAN€ ’²S FISCAL & TRADE DECIFIT

8/7/2019 RELATIONSHIP BETWEEN PAKISTANS FISCAL & TRADE DECIFIT

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RELATIONSHIP BETWEEN PAKISTANS

FISCAL & TRADE DECIFIT(TWIN DEFICIT)

ARSALAN ISLAMDATED: 13-12-2010


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EMPERICAL THEORY BEHIND THIS

RELATION KEYNESIAN OPEN ECONOMY MODEL STATES

Y=C+I+G+X-M---expenditure approach---(1)

Y=C+S+T----income appraoch---------------(2)

(X-M)=(S-I)+(T-G)----substitute-----(3)


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KEYNESIAN INCOME-EXPENDITURE APPROACH STATES

IN BUDGET DEFICIT

DOMESTIC ABSORPTION

DOMESTIC INCOME LEVEL

EXPORT

TRADE DEFICIT

IMPORT


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KEYNESIAN OPEN ECONOMY MODEL WITH HIGH

CAPITAL MOBILITY STATES

IN BUDGET DEFICIT

AGGREGATE DEMAND LEVEL

DOMESTIC REAL INTEREST RATE

INFLOW OF

FOREIGN

CAPITAL

LOCAL CURRENCY

EXPORT


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RICARDIAN EQUIVALENCE HYPOTHESIS

No link between the budget deficit and trade

deficit

Individuals are concerned about their life timebudget constraints and real wealth. Therefore,

In future tax rate, if current government

budget deficit increases, current savings

therefore there will be no impact on external

balance and the trade balance would remain

stable.


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RELATIONSHIP BETWEEN TWIN

DEFICIT

2000, aqeel and nishat examined the

Pakistans case and they found in short run the

causal effect was found negative between

budget deficit and trade deficit

However, in long run the causal effect on trade

deficit is positive.


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INTERNATIONAL RELATIONSHIP

1993, Rosenswieg and Tallman investigated that in

US economy, government deficit leads to trade

deficit.

2005, Basu, Suprana and Datta investigated the fiscaldeficit on Indias external accounts and did not found

existence of twin deficit in Indian economy.

2007, Lau and Haw investigated relation between the

twin deficits in Malaysia and Thailand and found

bidirectional relationship between these two deficits

in Malaysia however in Thailand its a one-way

causality, from budget deficit to trade deficit.


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REASONS FOR HIGH TRADE DEFICIT

The element of self-reliance lacking in the mechanism of

Pakistan's economy is one major reason as to why Pakistan

has to import goods mainly on heavy prices from other

countries.

The textile sector constitutes a major part of our exports and

although the exports of Pakistan have increased from before

they still contribute very little to the overall Gross National

Product of the country.

The main reason is that our government is not educated, over

the year they have not expended their goods to new

destinations.


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The biggest reason for budget deficit Pakistanexperiences is because it's import bills exceed it's

exports. Exports are foreign exchange earners and whenwe import it actually takes away our foreign exchangereserves thus creating a budget deficit.

Almost 50% of the import bill comprises of edible oilalone, now that is an excess which can easily be avoided.

A mismanagement of resources and funds exists whichfurther exacerbates the problem.

The insecure economic air makes it harder for Pakistanibusinessmen to conduct businesses and are moving their

investments to other countries. (flight of capital) Low quality of domestic goods, so people prefer

imported goods.


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Pakistan's main exports are dependent on the agricultural

goods which are also easily available in the neighboring

countries like Bangladesh and India and Indonesia etc, so evenhere Pakistan faces competition,

Tourism in Pakistan has also been declining due to the

unpopularity and increasing of illegal activities even though

Pakistan has tourist attraction but foreigners fear to come toPakistan due to the negative stories they have heard and they

deny to come to Pakistan so therefore Pakistan even suffers

due to less tourists who bring foreign currency of theirs into a

country


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REASONS FOR HIGH FISCAL DEFICIT

High expenses on non development

expenditure.

Inflationary pressure, decreases the value onmoney.

High expenses on interest payments on loans.

Increased levels of economic activity. levels of social benefits.


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REPERCUSSIONS ON ECONOMY

3% of annual fiscal deficit of GDP is good for a economy

In Pakistan, the economist expect 6.4% of GDP for 1QFY11

On the external side, the foreign remittance for the month

October 2010 stood at $855mn, Despite the fiscal deficit, the 1QFY11 current account deficit

declined by 7%, YoY to US$545mn.

The import bill for Oct 2011 stood at $3.22bln while exports

reached to $1.99bln, this trend is good for the economy. Higher current account deficit in the long term is not the

concern as long as it matches the foreign inflows in the

foreign direct investment or grants.


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Foreign reserves fell down to $16.85bln.

The implementation of RGST will not be onlycrucial in receiving the next grant from IMF

standby program but it will also boast the

revenue for the government, ultimately raising

the Tax-to-GDP ratio.

The inflationary digits will fell down from the

January 2011 due to higher base effect and

increased foreign inflows


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CONCLUSION

It is confirmed that in Pakistan one way

direction causal relationship exists showing

trade deficit positively effecting budget deficit.

Deterioration in current trade deficit leads to

slower pace of economic growth and hence

increase the budget deficit. Policies effectively

reduce the trade deficit would have a desiredimpact on the budget deficit.


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RECOMMENDATION

HOW TO CONTROLHIGH TRADE DEFICIT

This is generally accomplished directly through

import restrictions

Quotas

duties (though these may indirectly limit exports as well)

subsidizing exports

Influencing the exchange rate to make exports cheaper for foreign buyers will

indirectly increase the balance of payments. This is primarily accomplished by

devaluing the domestic currency

Adjusting government spending to favor domestic suppliers is also effective. Less obvious methods to reduce a current account deficit include

measures that

increase domestic savings

reduced domestic borrowing, including a reduction in borrowing by the

national government.

Documents

RELATIONSHIP BETWEEN PAKISTAN€ ’²S FISCAL & TRADE DECIFIT