Why Is It So Hard to Finance Budget Deficits? Problems of a Developing Country
IMF Working Papers, May 1, 2002
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Bibliographic details
- Authors: Shigeru Iwata, Andrew Feltenstein
- Published: May 1, 2002
- Series: IMF Working Papers
Summary
- Paper examines ways for a developing country to finance budget deficits from domestic resources by analyzing Pakistan's National Savings Scheme (NSS).
- NSS has a number of unusual attributes; its impact upon Pakistan's economy is not clear, but NSS is of great importance in financing the public sector deficit given Pakistan's chronic fiscal difficulties.
- An econometric model is used to analyze the relationship between demands for NSS deposits and other financial instruments, particularly bank deposits and foreign-currency deposits.
Key Empirical Findings
- NSS and bank deposits are net substitutes.
- NSS and foreign-currency deposits are net substitutes.
- Bank deposits and foreign-currency deposits appear to be neither substitutes nor complements.
- Estimated income elasticities:
- Income elasticity of demand for bank deposits is negative.
- Income elasticity of demand for foreign-currency deposits is positive.
- Income elasticity of demand for NSS is not significantly different from zero.
- Evidence that foreign-currency deposits are a net substitute for NSS deposits; foreign-currency deposits have absorbed part of the demand for NSS deposits.
- Implication: the availability of foreign-currency deposits may have reduced the ability of the government to finance itself.
Policy-Relevant Implications
- Substitution between NSS and other deposit instruments suggests limits to the government's ability to mobilize domestic resources via NSS when alternative instruments (especially foreign-currency deposits) are available.
- The differing income elasticities imply heterogeneous responses of deposit demand to income changes across instruments:
- Policies relying on increased private incomes to boost bank or NSS deposits may be ineffective given the negative or insignificant income elasticities observed.
- Foreign-currency deposit behavior (positive income elasticity) could undermine domestic-lending instruments used for public financing.
- Consideration needed of how foreign-currency deposit availability affects government debt management and the effectiveness of NSS as a domestic financing tool.
Content in this bundle
- Why Is It So Hard to Finance Budget Deficits? Problems of a Developing Country - WP/02/95