PROSPECTS OF RESOURCE DEFICITS AND DEBT FOR PAKISTAN: A SIMULATION ANALYSIS BASED ON THREE-GAP MODEL

Abstract

This study simulates the future time paths of debts and resource deficit in Pakistan using a three-gap simulation model. The study then shows the effect of different policies on simulated debts and resource deficits. The study finds that the debts and resource deficit will decrease if tax to GDP ratio and growth rate of the stock of private foreign direct capital increased. Decrease in government consumption will reduce resource deficits and foreign debts. Furthermore, the improvement in productivity will decrease the resource deficits while it will increase the domestic debt. Increase in private savings will decrease current account deficit and foreign debt while it will increase budget deficit and domestic debts. The study also shows that even if half of Pakistan’s external debt is written off, the fundamental issue of unsustainability that cause debt accumulation will not disappear. The main conclusion that comes out of the analysis is that the only sustainable solution to Pakistan’s debt problem involves improvements in tax collection, cuts in government’s consumption expenditure sand major institutional reforms to improve productivity and efficiency, especially in the public sector.