The Effects Of Fiscal Deficit And Trade Deficit Nexus On Pakistan's Economic Growth: An Econometric Analysis

Abstract

This study focused upon the effects of Fiscal Deficit (FD_t) in terms of Total Expenditure (TR_t) and Total Revenue (TR_t) as well as consequences of Trade Deficit (TD_t) in terms of Imports (IMP_t) and Exports (EXP_t) on economic growth of Pakistan (GDP_t) for the sample period 1994-95 to 2020-21. Augmented Dickey Fuller (ADF) Test found that dependent variable i.e GDP_t as stationary at level I(0), whereas independent variables i.e TE_t, TR_t, IMP_t, EXP_t, TD_t, as stationary at level I(1) differencing. Results of Autoregressive Distributed Lags Model (ARDL) followed by Bound Test, Error Correction Mechanism (ECM), Variance Inflation Factor (VIF), Heteroscedasticity Test, Lagrange Multiplier (LM) Test, Normality Test, Granger Causality Test, Impulse Response Function and Wald Test found significant negative influence of Fiscal Deficit (FD_t) and Trade Deficit (TD_t) on economic growth in short run and long run. The study concludes the implications in terms of causes and effects of Fiscal Deficit and Trade Deficit, which could be overcome and significantly impacted on economic growth, emphasizing the need to reduce the burden of fiscal deficits and trade deficits by boosting exports through good fiscal managerial strategy, provide employment and investment opportunities, enhance tax revenue, generate capital accumulation so necessary to alleviate poverty, control inflation and accelerate economic growth of Pakistan’s economy.