DEFENSE EXPENDITURES, FISCAL DEFICIT AND DEBT SERVICING NEXUS: A CASE STUDY OF PAKISTAN

Abstract

A number of the countries in the world are breathing under the shadow of hostilities and terror. Many developing countries squander major part of their GDP on defense to sustain their sovereignty. Border clashes with India and Afghanistan, Pakistan has to spend massive budget on defense. Therefore, Pakistan has been facing fiscal deficit every year. Moreover, Pakistan’s external debt servicing creates hurdles to increase per capita GDP. For this empirical finding for the time period from 1981-2019, the Johansen co integration and Granger causality tests are used. The empirical results indicate the existence of co-integration. The estimation shows that the defense expenditures and debt servicing statistically significant and negatively affect the per capita GDP, while fiscal deficit reveal the positive and significant impact on the same. The results confirm the existence of one-way causality between fiscal deficit and debt servicing, while causality runs from fiscal deficit to debt servicing.