{
  "title": "Why Is It So Hard to Finance Budget Deficits? Problems of a Developing Country",
  "publication": "IMF Working Papers, May 1, 2002",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/why-is-it-so-hard-to-finance-budget-deficits-problems-of-a-developing-country-15816",
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  "summary": "This paper examines possible ways for a developing country to finance budget deficits from domestic resources. It does so by analyzing Pakistan's National Savings Scheme (NSS).",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Paper examines ways for a developing country to finance budget deficits from domestic resources by analyzing Pakistan's National Savings Scheme (NSS).\n- 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.\n- 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."
    },
    {
      "heading": "Key Empirical Findings",
      "content": "- NSS and bank deposits are net substitutes.\n- NSS and foreign-currency deposits are net substitutes.\n- Bank deposits and foreign-currency deposits appear to be neither substitutes nor complements.\n- Estimated income elasticities:\n  - Income elasticity of demand for bank deposits is negative.\n  - Income elasticity of demand for foreign-currency deposits is positive.\n  - Income elasticity of demand for NSS is not significantly different from zero.\n- Evidence that foreign-currency deposits are a net substitute for NSS deposits; foreign-currency deposits have absorbed part of the demand for NSS deposits.\n- Implication: the availability of foreign-currency deposits may have reduced the ability of the government to finance itself."
    },
    {
      "heading": "Policy-Relevant Implications",
      "content": "- 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.\n- The differing income elasticities imply heterogeneous responses of deposit demand to income changes across instruments:\n  - Policies relying on increased private incomes to boost bank or NSS deposits may be ineffective given the negative or insignificant income elasticities observed.\n  - Foreign-currency deposit behavior (positive income elasticity) could undermine domestic-lending instruments used for public financing.\n- Consideration needed of how foreign-currency deposit availability affects government debt management and the effectiveness of NSS as a domestic financing tool.\n\n---\n\n Content in this bundle\n\n- Why Is It So Hard to Finance Budget Deficits?  Problems of a Developing Country - WP/02/95\n  - Why Is It So Hard to Finance Budget Deficits?  Problems of a Developing Country - WP/02/95 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Why Is It So Hard to Finance Budget Deficits?  Problems of a Developing Country - WP/02/95 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/why-is-it-so-hard-to-finance-budget-deficits-problems-of-a-developing-country-15816"
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    "Authors: Shigeru Iwata, Andrew Feltenstein",
    "Published: May 1, 2002",
    "Series: IMF Working Papers",
    "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.",
    "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:",
    "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.",
    "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:",
    "Consideration needed of how foreign-currency deposit availability affects government debt management and the effectiveness of NSS as a domestic financing tool.",
    "**Why Is It So Hard to Finance Budget Deficits?  Problems of a Developing Country - WP/02/95**"
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