Empirical Analysis of Fiscal Imbalance in Pakistan

Abstract

Fiscal imbalance adversely affects an economy. It enhances inflation, reduces development, and consequently, the government and people suffer. This phenomenon is more common in developing countries with reliance on natural resources and agriculture. Given the importance of fiscal imbalance, this research incorporates vital macroeconomic determinants that have a significant association with the fiscal imbalance of Pakistan. This article analyses the relationship between a fiscal imbalance concerning vital macroeconomic indicators. We have taken dependent variables such as fiscal imbalance and independent variables such as total debt service, trade, broad money, current account balance, net inflows, government expenditure, and government income as a percentage of GDP. In contrast, GDP per capita, total debt service, GDP deflator, and foreign direct investment data were collected from 1970 to 2019. The results revealed a long-run association between the dependent and independent variables, and there is a short-run relationship between fiscal imbalance and GDP per capita. This research conclusively represents the impact of macroeconomic indicators on Pakistan’s fiscal imbalance in the short and long term.

Keywords

• keynesian school of thought
• macroeconomic indicators
• fiscal imbalance