This study is an endeavor to investigate whether central bank independence influences the budget deficit or not in the SAARC regions. Central bank independence is observed via undertaking two indices such as CWN (Proxy for de jure independence) and TOR (de facto independence). For empirical analysis, GMM-IV estimation technique is employed by using data from 1981 to 2010. Findings show that policy formulation by central bank has negative and statistically significant impact on budget deficit. Keeping other things constant, result implies that policy formulation reduces budget deficit, whereas policy implementation is not found statistically significant in affecting budget deficit. Further, obtained results indicate that lag period inflation, money growth and GDP growth reduce budget deficit whilst current period variables play no role in doing so i.e. inflation, money growth and GDP growth affect budget deficit with one period lag. Unit-Root test confirms the stationarity of the data. J-stat is employed to observe the validity of the instruments, which confirms that lag instruments are valid. Supervisor:- Dr. Attiya Yasmin Javid