Fiscal Policy and Sectoral Growth in Pakistan

Abstract

Main objective to write this paper was to find out impact of fiscal policy on sectoral growth in Pakistan. Annual data for period 1980-2021 was used from world development indicators of World Bank (2021). ADF and PP unit root test were employed to check the stationarity of all variables. ADRL bound testing was considered as estimation technique because some variables were stationary at level and some were at first difference while no variable was stationary at second difference. Three models were estimated where dependent variables were agriculture, industry and services while independent variables were GDP per capita, total debt services, external balance on goods and services, and gross national expenditures. These most repeated variables are selected from existing empirical literature on impact of fiscal policy over economic growth. All variables related to fiscal policy affected agricultural sector positively and insignificantly except total debt services that has positive and significant impact on agricultural sector. GDP per capita, inflation and total debt services have positive and significant effect on industrial sector while this sector was affected negatively and significantly by external balance of goods and services and gross national expenditures. All explanatory variables showed negative and significant association with services sector except total debt services that has positive and significant relationship with services sector. The error correction terms for agricultural, industrial and services sectors respectively are negative (-3.185, -1.674 and -2.110 respectively) indicated that the system was stable and converged to the equilibrium track following a disturbance. All diagnostic and stability tests satisfied the basic requirements of model suitability. Keywords: Fiscal Policy, GDP, Agriculture, Industry, Services, Inflation

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