Three Essays On Fiscal Behavior In Pakistan
Author: Sidra Sohail

Pakistan like other developing economies is confronted the issue of fiscal imbalances accompanied by an increasing debt burden that is the root cause of macro-economic instability, which in turn has impeded the medium-to-long term growth prospects. The study attempts to address three significant issues relating to the persistently large fiscal imbalance in Pakistan. First, the rising trend in the interest burden on domestic debt threatens the sustainability of the current macro-economic stance. Second, servicing the country‘s domestic debt puts large claims on government resources, which reduces the government‘s capacity to spend on development activities. Thirdly, the government must rely on foreign economic assistance to fulfill its development and non-development spending needs. Pakistan is placed among the family of aid-dependent developing countries and this characteristic of Pakistan‘s economy makes it a pertinent case for scrutinizing budgetary response to aid. In essay one, the present study looks at the influence of disaggregated aid flows on key fiscal variables in Pakistan using a fiscal response model applied to annual time series data over the period 1972 to 2016. Along with investigating how does the project aid and program aid influence the fiscal aspect of the government and study also investigates the magnitude of fungibility in foreign aid for Pakistan. We have disaggregated government expenditures into three categories i.e., current expenditure, development expenditure, and socio-economic expenditures. The study has decomposed foreign aid into project aid and program aid. The study has used tax revenue to measure the revenue side. For empirical analysis, the study has used the 3SLS estimation technique. The findings of the study paint quite a dismal picture prevailing in the country. Program aid and Project aid are largely earmarked for nondevelopment public spending respectively this shows that project aid and program aid both are fungible in the case of Pakistan although extent of fungibility is high for program aid as compared to project aid. Results further reveal that the inflow of foreign economic assistance in the form of project aid and program aid tends to displace tax revenue in the country which is a grave adverse fiscal consequence of aid for the country. In essay two the study conducts analysis for exploring the effects of fiscal policy shocks in the presence of institutional quality on some important macroeconomic variables at the national level and output at the provincial level. To this end, initially, impulse functions are used to examine the response of macroeconomic variables to a fiscal policy shock. Then, a variance decomposition analysis is applied to regulate the contribution of fiscal policy variables in the forecasted errors of all variables at the national and provincial levels. The result shows that fiscal policy shocks have ii limited stabilization effects on the economy because government-spending shock is transmitting inflationary pressure in the economy. At national and provincial levels, we find that the improvement in institutions increases the efficiency of fiscal policy. The institutions being the central element of fiscal policy effectiveness, to attain stabilization of economy, institutional quality needs to be strengthened. In most cases at national and provincial levels, government expenditure has a significant positive effect on output level but this influence is not as robust as anticipated theoretically. Consequently, there is a need to direct the available public expenditures for making an investment under development projects instead of consuming for current expenditures. Results further reveal that government expenditures and government revenues both are causing each other but government expenditures impact is dominant, suggesting that the government can control the fiscal deficit by managing its expenditures. Hence, the government should follow the expenditure regulated fiscal policy. In essay three, the study also examines the influence of fiscal decentralization and institutional quality on government size of Pakistan. The study has used three measures of fiscal decentralization, tax revenue decentralization, revenue decentralization based on federal transfers to provinces, and expenditure decentralization. The study uses the generalized method of moment (GMM) method to investigate this link between fiscal decentralization and government size. The result shows that tax revenue decentralization decreases government size, however, expenditure decentralization increases the government size in Pakistan. However, the relative size of government reduces the presence of good quality institutions Supervisor:- Dr. Attiya Yasmin Javid

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Supervisor: Attiya Yasmin Javid

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