Twin Deficits Revisited: The Role of Fiscal Institutions in Pakistan

Abstract

The economy of Pakistan is facing the problem of the persistent current account and the budget deficit in the past many years. This study addresses the important question of whether the budget deficit affects the current account components of the balance of payments, creating imbalances therein as well. The main objective of this research is to investigate the association between the budget and the current account deficit in Pakistan. The study has taken data from the period 1980-2021. Johansen’s cointegration approach has been applied to find the long-run association and the results imply a positive and considerable long-run association between budget deficit and current account deficit. The Vector Error Correction Model (VECM) specifies the convergence or deviation of the market in the short run to the long run. The finding shows that there is a long-run connection between the budget and the current account deficit. The study suggests that government should focus on a sound budgeting policy and focus to make exports more competitive in the foreign market.